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                                   AN
                                INQUIRY
                                INTO THE
                   PRINCIPLES OF POLITICAL OECONOMY:

                                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_, Bart.

------------------------------------------------------------------------

 _Ore trahit quodcumque potest atque addit acervo._ HOR. Lib. I. Sat. 1

------------------------------------------------------------------------

                               _VOL._ II.

------------------------------------------------------------------------

                                LONDON:
          Printed for A. MILLAR, and T. CADELL, in the Strand.

                               ----------

                               MDCCLXVII.

------------------------------------------------------------------------

                                CONTENTS
                                 OF THE
                             SECOND VOLUME.

------------------------------------------------------------------------

                               BOOK III.

                           OF MONEY AND COIN.


                                PART II.

               The principles of Money applied to trade.

 CHAP. I. Consequences of imposing the price of coinage, and the  Page
   duty of seigniorage, upon the coin of a nation, in so far as      1
   they affect the price of bullion, and that of all other
   commodities,

     Intricacy of this subject,                                      2

     Recapitulation of some principles,                              —

     The first introduction of coinage must make prices fall         3

     Consequences of the exclusive privilege of coining,             4

     A wrong balance of trade raises the price of bullion to the     5
     value of coin,

     And ought to raise proportionally the price of commodities,     —

     How traders obstruct the operation of this principle, while     6
     the balance of trade continues fluctuating,

     And how an overturned balance of trade attaches prices to       7
     the denominations of coin,

     How profits consolidate into prime cost,                        8

     And are preserved upon articles of home consumption,            9

     But are torn away by foreign competition, for articles of       —
     exportation,

     How this hurts the industrious, and how the state may          10
     indemnify them,

 CHAP. II. Concerning the influence which the imposing the price    11
   of coinage, and the duty of seigniorage, in the English mint,
   will have upon the course of exchange, and trade of Great
   Britain,

     Theory of prices upon articles of exportation,                  —

     How the course of exchange is regulated,                       13

     Price of exchange, what?                                        —

     Where coinage is free, the price of bullion ought to be         —
     invariable,

     And fluctuating where coinage is imposed,                       —

     Bullion in England dearer than in France,                      14

     Because the price of it is kept up by the mint,                 —

     And is allowed to fall in France 8 _per cent._ below the        —
     coin,

     This a wise regulation,                                         —

     England loses by this sometimes 8 _per cent._ upon her         15
     trade with France,

     And at a medium 4 _per cent._ as is proved by a matter of      17
     fact,

     Easy to be verified at all times by the price of bullion       18
     and course of exchange in the Paris market,

     When bullion is exported to England, exchange is against        —
     France,

     Course of exchange no rule for judging of the balance of        —
     trade, but only of the value of coin,

     The real par not to be calculated by the intrinsic value of    19
     the coin, unless bills were drawn in weight of fine
     bullion,

     OBJ. Exchange _regulates_ the price of bullion,                20

     ANSW. Denied: Exchange only _raises_ its price, the mint        —
     price _pulls it down_,

     _Balance upon the real par_ no mark of _a balance_ upon         —
     trade, proved by examples,

     Balance of trade, what?                                        21

     The real par of exchange to be fixed by the fluctuating         —
     value of the coin, not by the permanent quantity of the
     bullion it contains,

     Proof of this proposition,                                     22

     Application of these principles to the English trade with      24
     France,

 CHAP. III. Is the loss which the course of exchange marks upon     25
   the trade of Great Britain with France, real or apparent,

     Reason for proposing this question,                             —

     Suppositions,                                                   —

     Principles,                                                    25

     How the paying for coinage affects the profits on goods        26
     _exported_,

     When the balance is favourable,                                27

     And how, when unfavourable,                                    28

     How the paying for coinage affects the profits on goods         —
     _imported_,

     When the balance is favourable,                                 —

     And how, when unfavourable,                                     —

     The more trade is favourable, the more adviseable it is to     29
     impose a price upon coinage,

 CHAP. IV. Of the different methods of imposing coinage, and of     30
   the influence they respectively have upon the value of the
   money unit, and upon the domestic interests of a nation,

     Two ways of imposing coinage,                                   —

     Plan laid down in this chapter,                                31

     How coinage is imposed by authority,                            —

     How by consent,                                                 —

     When by authority, what the consequence,                        —

     The metals are exported,                                        —

     How, in France, this is prevented in some measure,             32

     French policy as to coin not generally understood,              —

     How coinage influences the price of inland commodities,        33

     A case not to be resolved by this theory, but left to be        —
     verified by experiment,

     An objection answered,                                          —

     Coinage affects the price of bullion immediately, and that     34
     of commodities indirectly,

     Consequence of the price of coinage, when imposed with          —
     consent,

     That bullion is brought to the mint, when trade is             35
     favourable,

     How the mint price of the metals may be allowed to vary,       36

     Influence of this method of imposing coinage, on the price     37
     of commodities, and value of the pound sterling,

 CHAP. V.  How an experiment may be made to discover with           38
   certainty the real effects of the imposition of coinage,

     Plan of the experiment proposed,                               39

     The consequence of this will be, to recall the old guineas      —
     from abroad,

     During this experiment a close attention must be had to the    40
     rate of prices,

     And if they vary how to discover the true cause,                —

     Farther consequences of this experiment,                        —

     Can we estimate the wealth of a nation by the quantity of      42
     its coin?

     Just as we can estimate a man’s estate by the weight of his    43
     purse,

 CHAP. VI. Miscellaneous questions and observations concerning      44
   the doctrine of money and coin,

     The use of a miscellaneous chapter at the end of a subject,     —

     QUEST. 1. Why does the doctrine of money appear so             45
     intricate?

     ANSW. Because it is perplexed with jargon,                      —

     The denominations of coin are confounded with the intrinsic     —
     value,

     The terms metal, money, coin, bullion, and price, are all      46
     considered as synonimous,

     What is meant by _metal_? what by _money_? what by _coin_?      —
     what by _bullion_? what by _price_?

     Of the abuse of the terms _rising_ and _sinking_, and of        —
     the inaccuracy of speech,

     Prices attached to the denominations of coin,                  47

     _Coinage raises the value of coin_, is a more proper            —
     expression, than _coinage sinks the price of commodities_,

     How to avoid such ambiguities of speech,                        —

     A case which cannot be resolved by this theory,                 —

     In speaking we do not distinguish between pure metal, and      48
     that which is mixed with alloy,

     Of the abuse of terms relative to denominations of coins,      49

     This illustrated by an example,                                 —

     Farther obscurities from the abuse of language,                 —

     How to avoid such abuse,                                       50

     QUEST. 2. What is the difference between raising the value      —
     of coin, by imposing coinage, and raising the denomination
     of it?

     ANSW. The first is real, and affects foreign nations; the       —
     other does not,

     Proved by an example,                                          51

     How the arbitrary method of raising the denominations of        —
     coin affects prices at home,

     QUEST. 3. How will the imposition of coinage affect the        53
     creditors of Great Britain?

     ANSW. If they continue to be paid by denominations, they        —
     will gain; if by weight of metal, they will not gain, nor
     will they lose,

     Proved by an example,                                           —

     How the imposition of coinage advances the credit of           54
     France,

     QUEST. 4. Is the plan we have proposed effectual towards        —
     preserving the pound sterling invariable?

     ANSW. No: but seems to be the best relative to material         —
     money,

     A scale of value realized in metal never can be exact;          —
     because the metal itself varies in its value,

     1. From the manufacturing of it. 2. From the interest of       55
     money. 3. From the manners of a people,

     The only exact scale of value is that which can measure the     —
     metals like every other commodity,

     Explanation of this proposition, by an example,                 —

     And by an application, to the bank of Amsterdam,               56

     How the locking up the coin in that bank renders the value      —
     of it more stable,

     QUEST. 5. Will not the imposition of coinage in England        57
     frequently stop the mint?

     ANSW. Certainly: when the balance of trade is unfavourable,     —

     But this is an advantage to England which France now           58
     enjoys,

     The coin of France passes in other nations above its value      —
     as a metal, and returns to France unmelted,

     QUEST. 6. Is not this return a loss to France?                  —

     Intricacy of this question,                                    59

     Resolution of it,                                               —

     It is no loss to France,                                       60

     Another view of this question,                                  —

     QUEST. 7. If by overrating gold the English lose their         61
     silver, why should not France by overrating silver lose her
     gold?

     ANSW. Because the English rate their gold above the value       —
     of it in their own market. The French do not so with their
     silver,

     How the proportion of the metals is kept nearly the same in    62
     all European markets?

     Because when home demand disturbs the proportion, foreign       —
     trade brings it even again,

     Coins of gold and silver should be proportioned at the rate    63
     of the market at home,

     And nations cannot fix that proportion by any convention        —
     among themselves,

     Why is the proportion of the metals so different in Europe      —
     and in Asia?

     Answer to this,                                                 —

     QUEST. 8. Is it the interest of Princes to debase the          64
     standard of their coin?

     ANSW. It is their immediate interest when they are debtors,     —
     and it is their interest to raise it when creditors; but
     always unjust,

     Who are debtors and who creditors; and how Princes who         65
     incline to rob their subjects may avoid robbing themselves
     at the same time,

     Example of a Prince who is now employing this engine            —
     against his enemies, not his subjects,

     Writers against this practice have used wrong arguments to     66
     dissuade Princes from it,

     The proper arguments against it are three,                     67

     1. It disturbs the ideas of people with regard to value,        —

     2. It either robs the class of debtors, or creditors,           —

     3. It ruins credit,                                             —

     This last circumstance will probably put an end to the          —
     practice,

     QUEST. 9. What is the best form to be given to coin?            —

     Difference between medals and coins,                            —

     Of indenting the impression,                                    —

     The less the surface, the wearing is the less,                 68

     The advantage of having heavy pieces for the greatest part      —
     of the coin: yet small denominations are useful in some
     cases, for preventing the rise of prices,

     Mixed metal better than copper for small denominations, as      —
     appears from the practice in Germany,

     Mixed metal never to be bagged up with fine,                   69

 CHAP. VII. Of the regulations observed in France, with regard      70
   to coin, bullion, and plate,

     The marc is the unit of French weight at the mint,              —

     The remedy of weight upon silver, what?                         —

     The standard of fineness is 11 fine to 1 of alloy,              —

     Remedy of alloy, what?                                          —

     Quantity of fine silver in a marc, as it is delivered at       71
     the mint,

     Into what coined,                                               —

     Mint price of a marc of fine silver,                            —

     The price of coinage 8⅕ _per cent._ upon silver,                —

     Remedy of weight upon gold,                                     —

     The fineness of standard gold,                                 72

     The remedy of alloy upon gold,                                  —

     The marc into what coined,                                      —

     Mint price of a marc of fine gold,                              —

     The price of coinage 8⅕ _per cent._ upon gold,                  —

     Which no way stops the mint,                                    —

     Of the proportion of the metals,                               73

     How to discover it,                                             —

     The proportion is as 1 to 14.47,                                —

     Gold contained in a louis d’or, and silver in a crown of 6      —
     livres,

     Proportion of a French grain to a troy grain,                   —

     Proportion between the louis and the guinea,                   74

     Of the fineness of French wrought plate,                        —

     Goldsmiths profit by the imposition of coinage,                75

     And never find the mint in competition with them for the        —
     metals,

     Advantages of the French regulations,                           —

     High price of bullion in the Paris market during the year      76
     1760,

     Present state of the wearing of the French silver coin,        77

 CHAP. VIII. Of the regulations observed in Holland, with regard    78
   to coin and bullion,

     Present state of the Dutch currency,                            —

     Regulations in the Dutch mint,                                 79

     Their unit of weight is the marc Hollands troes,                —

     The remedy of weight on silver,                                 —

     The fineness of silver is different in different coins,         —

     Florins are 11⁄12 fine with one grain of remedy,                —

     How they reckon their silver standard,                          —

     Exact quantity of fine silver in a marc weight of Dutch        80
     florins as they come from the mint,

     Mint price of fine silver,                                      —

     Price of coinage in Holland is 1½ _per cent._ upon silver,      —

     Of the Dutch gold coins,                                       80

     The ducat has no legal denomination,                            —

     The fineness of it 23 carats 8 grains,                         81

     How the fineness is reckoned,                                   —

     Fineness of the ducats of the empire,                           —

     Exact quantity of fine gold in a marc weight of Dutch           —
     ducats as they come from the mint,

     Mint price of fine gold,                                        —

     Price of coinage upon ducats about 1 _per cent._               82

     The price of coinage upon both species should be the same,      —

     The rider                                                       —

     Has a legal denomination, and is a lawful tender in             —
     payments to ⅓ of the sum,

     As it is always coined by the state, and for the state          —
     there can be no mint price,

     Regulation as to the fineness, denomination, and weight of     83
     the rider,

     Quantity of fine gold in a florin of riders,                    —

     To put the ducat upon a par with riders, it should              —
     circulate for 5 florins 4⅛ stivers,

     Utility of not fixing the denomination of ducats,               —

     How to find the proportion of the metals in the coin of        84
     Holland, and a wonderful phænomenon in the value of ducats,

     Were all the coin of full weight the proportion would be as     —
     1 to 14.62,

     Quantity of fine silver in a florin piece,                     85

     Quantity of fine gold in a florin of riders,                    —

     Investigation of this proportion as to the ducats,              —

     By which it appears that the war has raised the value of       86
     gold, and set the market proportion of the metals in
     Holland at 1 to 14.785,

     Which is a rise in the value of gold of 1.12 _per cent._        —

     The intention of this minute detail is to calculate the        87
     real par of the coins of Europe,

     Proportion between the mint weights of Holland, England,        —
     France, and Germany,

     Par of a pound sterling (in weighty silver) with Dutch         88
     florins in riders, is 11 florins 12 stivers,

     Par of a pound sterling in gold with ditto, is 11 florins       —
     3⅕ stivers,

     Par of a French louis with ditto, 11 florins, 3¾ stivers,       —

     Par of 24 livres French in silver with ditto, 11 florins 1½     —
     stivers,

     Great balance of trade against France in September 1761,        —

     Low value of the pound sterling in Holland in 1761,             —

     Owing to the lightness of the English gold at that time,       89

     And not to the wrong balance of their trade, as was            91
     alleged,

     Defects of the silver currency of Holland,                      —

     Account of this currency,                                      92

     Regulation for the payment of foreign bills in coin,            —

     Ditto for current bills—ditto for merchandize,                  —

     The denominations of the several silver currencies not          —
     proportioned to their intrinsic value,

     Cause of this.—-Regulations concerning the weighing of         93
     silver species in banks current,

     All allowances for light weight are an abuse,                  94

     Frauds of money-jobbers in Holland,                             —

     The best silver coin in Holland is upon an average 1 _per       —
     cent._ too light,

     From which it follows that the actual proportion of the        95
     metals is as 1 to 14.479,

     Another abuse in the silver coin of Holland,                    —

     Reason of the great apparent scarcity of the silver coin in    96
     Holland,

     A paradox to be resolved,                                       —

     Resolution of it,                                              97

                                BOOK IV.

                          OF CREDIT AND DEBTS.

                                PART I.

                       Of the Interest of money.

 INTRODUCTION,                                                 Page 101

 CHAP. I. What Credit is, and on what founded,                      105

 CHAP. II. Of the nature of obligations to be performed, in         108
   consequence of credit given,

 CHAP. III. Of the interest of money,                               112

 CHAP. IV. Of the _principles_ which regulate the rate of           115
   interest,

 CHAP. V. Of the regulation of interest by statute,                 121

 CHAP. VI. What would be the consequences of reducing, by a         125
   British statute, the legal interest of money below the
   present level of the stocks?

 CHAP. VII. Methods of bringing down the rate of interest,          129
   in consequence of the principles of demand and
   competition,

 CHAP. VIII. Is the rate of interest the sure barometer of          135
   the state of commerce?

 CHAP. IX. Does not interest fall in proportion as wealth           139
   increases?

------------------------------------------------------------------------

                                PART II.

                               Of Banks.

 CHAP. I. Of the various kinds of credit,                           141

 CHAP. II. Of private credit,                                       144

 CHAP. III. Of banks,                                               146

 CHAP. IV. Of banks of circulation upon mortgage or private         150
   credit,

 CHAP. V. Such banks ought to issue their notes on private,         153
   not mercantile credit,

 CHAP. VI. Use of subaltern bankers and exchangers,                 154

 CHAP. VII. Concerning the obligation to pay in coin, and           157
   the consequences thereof,

 CHAP. VIII. How a wrong balance of trade affects banks of          161
   circulation,

 CHAP. IX. How a grand balance may be paid by banks, without        162
   the assistance of coin,

 CHAP. X. Insufficiency of temporary credits for the payment        164
   of a wrong balance,

 CHAP. XI. Of the hurt resulting to banks, when they leave          165
   the payment of a wrong balance to exchangers,

 CHAP. XII. How the payment of a wrong balance affects              169
   circulation,

 CHAP. XIII. Continuation of the same subject; and of the           178
   principles upon which banks ought _to borrow abroad_, and
   _give credit at home_,

 CHAP. XIV. Of optional clauses contained in bank notes,            195

 CHAP. XV. Of subaltern banks of circulation, and of their          202
   competition with one another,

 CHAP. XVI. Of some regulations proper to be made with              205
   regard to national banks,

 CHAP. XVII. When, and in what case, banks should be obliged        208
   to keep open books,

 CHAP. XVIII. Is it the interest of banks to grant credits          210
   and cash accompts to exchangers and others, who make a
   trade of sending coin out of the country?

 CHAP. XIX. Application of the principles above deduced,            212
   towards forming the policy of circulation,

 CHAP. XX. Objections to this doctrine,                             215

 CHAP. XXI. How, by a return of a favourable balance, the           218
   bank may be enabled to pay off the debts due to
   foreigners, and thus deliver the nation from that burden,

 CHAP. XXII. Of banks of circulation, established on                220
   mercantile credit,

 CHAP. XXIII. Of the first establishment of Mr. Law’s bank          235
   of circulation, in the year 1716,

 CHAP. XXIV. Account of the variations of the French coin           236
   some time before and after the death of Louis XIV.

 CHAP. XXV. Continuation of the account of Law’s bank,              239

 CHAP. XXVI. Account of the royal Mississippi bank of               243
   France, established on public credit,

 CHAP. XXVII. A short account of the French company of the          247
   Indies,

 CHAP. XXVIII. Chronological anecdotes,                             250

 CHAP. XXIX. Continuation of the royal bank of France, until        252
   the time the company cf the Indies promised a dividend of
   200 livres _per_ action,

 CHAP. XXX. Inquiry into the motives of the Duke of Orleans         256
   in concerting the plan of the Mississippi,

 CHAP. XXXI. Continuation of the account of the royal bank          265
   of France, until the total bankruptcy the 21st of May
   1720,

 CHAP. XXXII. Conclusion of the Mississippi scheme,                 270

 CHAP. XXXIII. Why credit fell, and how it might have been          276
   supported,

 CHAP. XXXIV. How the diminishing the denomination of the           284
   paper in circulation, by the arret of the 21st of May
   1720, destroyed the credit of France, when the same
   arbitrary measures taken with regard to the coin had
   produced no such effect,

 CHAP. XXXV. How a bank may be safely established in France,        289
   as matters stand at present,

 CHAP. XXXVI. Of banks of deposit and transfer,                     291

 CHAP. XXXVII. Of the bank of Amsterdam,                            292

 CHAP. XXXVIII. Of the agio of the bank of Amsterdam,               294

 CHAP. XXXIX. Continuation of the same subject; and                 298
   concerning the circulation of coin through the bank of
   Amsterdam,

------------------------------------------------------------------------

                               PART III.

                              Of Exchange.

 CHAP. I. OF the first principles of exchange,                      310

 CHAP. II. How to determine exactly the true and intrinsic          316
   value of the metals, coin, or money, in which a balance
   to foreign nations is to be paid,

 CHAP. III. How to remove the inconveniences which occur in         325
   paying balances with the metals or coin of a nation,

 CHAP. IV. How the price of exchange, _in a prosperous              333
   trading nation_, may be prevented from operating upon the
   whole mass of reciprocal payments, instead of affecting
   the balance only,

 CHAP. V. How, when other expedients prove ineffectual for          344
   discharging of balances, the same may be paid by the
   means of credit, without the intervention of coin or
   bullion; and who are they who ought to conduct that
   operation,

------------------------------------------------------------------------

                                PART IV.

                           Of public Credit.

 CHAP. I. Of the various consequences of public debts,              348

 CHAP. II. Of the rise and progress of public credit,               351

 CHAP. III. Of anticipations, or borrowing money upon               354
   assignments to taxes, for the discharge of principal and
   interest,

 CHAP. IV. Of the state of public credit in France before           367
   the reign of Louis XIV. and of the sentiments of the
   great Richlieu upon that subject,

 CHAP. V. Of the present state of public credit in Great            380
   Britain,

 CHAP. VI. State of the public credit of France; their              402
   debts, funds, and appropriations, at the peace 1763,

 CHAP. VII. Comparative view of the revenue, debts, and             438
   credit of Great Britain and France,

 CHAP. VIII. Contingent consequences of the extension of            441
   credit, and increase of debts,

 CHAP. IX. Of bankruptcies,                                         456

 CHAP. X. Methods of contracting and paying off public              465
   debts,

                                BOOK V.

        Of Taxes, and of the proper application of their amount.

 INTRODUCTION,                                                      482

 CHAP. I. Of the different kinds of taxes,                          484

 CHAP. II. Of proportional taxes, and their proper object,          486

 CHAP. III. How proportional taxes are drawn back by the            490
   industrious; and how that drawing back is the only reason
   why taxes raise the prices of commodities,

 CHAP. IV. Of cumulative taxes,                                     495

 CHAP. V. Of the inconveniences which proceed from                  500
   proportional taxes, and of the methods of removing them,

 CHAP. VI. Cumulative and proportional taxes compared with          517
   one another, and farther examined,

 CHAP. VII. Consequences of taxes, when the amount of them          523
   is properly applied,

 CHAP. VIII. Of the extent of taxation,                             527

 CHAP. IX. The consequences of an abolition of taxes,               542

 CHAP. X. Are taxes a spur to industry, as some pretend?            556

 CHAP. XI. Considerations upon land taxes, with some                561
   observations upon those of England and France,

 CHAP. XII. Miscellaneous questions upon taxes,                     577

 CHAP. XIII. Recapitulation of the fourth book,                     593

 CHAP. XIV. Recapitulation of the fifth book,                       637

------------------------------------------------------------------------

                                   AN

                                INQUIRY

                                INTO THE

                   PRINCIPLES OF POLITICAL OECONOMY.

------------------------------------------------------------------------


                               BOOK III.
                           OF MONEY AND COIN.

                                PART II.
               THE PRINCIPLES OF MONEY APPLIED TO TRADE.

------------------------------------------------------------------------


                                CHAP. I.
    _Consequences of imposing the Price of Coinage, and the Duty of
Seignorage upon the Coin of a Nation, so far as they affect the Price of
              Bullion, and that of all other Commodities._


The political oeconomy of modern states is so involved with the
interests of commerce, that it is necessary at every step we make, to
keep in our eye the combinations which arise from that quarter.

Whatever tends to simplify an intricate theory, greatly assists the
mind: dividing this book into two parts, seems, as it were, dividing the
burden it has to carry: the principles already deduced may there ripen
by a short pause, and the analogy of the matter which is to follow in
the second part, where new combinations are taken in, will recall them
to the mind and fix them in the memory.

[Sidenote: Intricacy of this subject.]

I am now to examine one of the nicest principles in the whole doctrine
of money, to wit, the effects of imposing the price of coinage, and the
duty of seignorage upon coin.

When this question is considered in relation to all the combinations
which arise, 1. from the nature of coin considered as a metal, and at
the same time as a money of accompt; 2. from the influence this duty has
upon the price of commodities; and 3. from the imposition as affecting,
_directly_, the nation which lays it on, and all other nations trading
with it _occasionally_: when all these combinations are taken together,
I say nothing will be found more difficult than to reduce this question
to a distinct theory.

What I have to say upon it has found a place in this inquiry, rather
with a view to suggest ideas to men of a better capacity, than from the
hopes of satisfying my readers in every particular.

[Sidenote: Recapitulation of some principles.]

I have said, that gold and silver are commodities merely like every
other thing. I have shewn the utter impossibility of their being a
scale, or an invariable measure of value. I have observed that their
being made into coin (_among trading nations_) has not the effect of
rendring them less a commodity than they were before, except so far, as
by that operation every piece, instead of being valued by its own
weight, comes to be in the mean proportion of all the pieces which
compose the currency: and I have shewn how the operations of trade are
capable to sift out and establish this mean proportion, in spite of very
great irregularities. These are the principles laid down in the first
part, which we must keep in our eye while we examine the question.

Since gold and silver, then, are commodities like every other thing, the
invariable scale of value must measure _them_ as well as every other
commodity, and money of accompt must be considered in no other light,
than as a scale for expressing the proportional value of grains of
metals, yards of stuffs, pounds of wares, bushels of grain, or gallons
of liquors. In this view, when we mention a hundred pounds, it is just
as proper to consider this value relatively to the measure of any
merchandize, as to the metalic measure of the coin. Every merchandize,
when considered by itself, should be measured by its own measure, gold
by grains, liquors by gallons, wheat by bushels, &c. The denominations
of pounds, shillings, and pence, are only necessary for reducing all
other sorts of weights and measures to an equation of value. This is
what is understood by the universal scale of proportional value. I think
this idea is sufficiently clear.

[Sidenote: The first introduction of coinage must make prices fall.]

Let us now suppose a country where the invention of coin is not known,
and where a yard of cloth of a certain quality, is commonly sold for 100
grains of either silver or gold, no matter which. The state falls upon
the invention of coining, the conveniency of which every body
understands. This coinage, I suppose, costs 2 _per cent._ Coin is
introduced, and commodities are ordered to be bought with it. I ask,
what effect ought this revolution to produce upon the price of the
cloth, according to strict theory, and without taking in any other
combination of circumstances? I answer, that the cloth ought in reason
to fall 2 _per cent._ that is, that the price of a yard ought to be a
coin of 98 grains. Here is the reason: He who formerly had the 100
grains, had the value of the yard of cloth, and could change the one for
the other when he would. Now he has the 100 grains, but he must give two
grains to have it coined, before he can buy; because after this
invention people will not trust to the weighing of private people, nor
to the purity of the metals; but they will believe, upon the authority
of the stamp, that in every piece a certain number of grains of the fine
metal is contained. He, therefore, who has a coin of 98 grains, comes to
the merchant, and offers him his coin for his yard of cloth; the
merchant demands a coin of 100 grains, says the other, these 98 grains
which I give you in coin, cost me two grains to have their weight and
fineness ascertained; and if you refuse to repay me for what I have paid
for this manufacture which I offer you for your cloth, I may with equal
reason refuse to pay you for what you paid for weaving your wool into
cloth. Now since I, in buying your cloth, must pay the weaver, so you,
in buying my piece, must pay the mint. The merchant, convinced by this
reasoning, takes the piece, and as it circulates from hand to hand,
every commodity given in exchange for it, must fall 2 _per cent._
relatively to the grains of metal it was worth before.

[Sidenote: Consequences of the exclusive privilege of coinage.]

Farther, if by the laws and customs of a country, coin is absolutely
necessary for buying and selling, this coin must be had; and if there be
but one person who can make it, the price he thinks fit to demand for it
is the only measure of the value of fabrication. The grains of the
metals, therefore, in the coin, must rise in their proportional value to
yards of cloth, and to gallons of liquor, in proportion to the cost of
coinage, as the pounds of wool and silk must rise in their value in
proportion to their manufacture.

From this it follows, that since the value of coin must rise in
proportion to every commodity, it must also rise with respect to the
metals it is made of, just as wool manufactured rises with respect to
wool which is not manufactured.

Now let us suppose that a Prince finding that he has the exclusive
privilege of making coin, shall raise his price of coinage to 8 _per
cent._ what will the consequence be?

The first consequence of this will be to destroy, or at least to perplex
the ideas of his subjects with regard to coin, and to make them believe,
that it is the stamp, and not the metal which constitutes the value of
it.

The next consequence will be, to reduce the price of the yard of cloth,
which was worth 100 grains of metal before the invention of coinage,
from 98, where it stood, to 92. Now let us suppose that this country,
which we shall call (F), is in the neighbourhood of another which we
shall call (E), where there is both cloth of the same quality, and coin
of the same weight and fineness, which costs nothing for the coinage. In
the country (E), _cæteris paribus_, the yard of cloth must be sold for
100 grains, as it sold formerly in the country (F) before the coinage
was imposed. If the country (F) wants the cloth of the country (E), the
cloth they demand must cost (F) 100 grains the yard. If the country (E)
wants the cloth of the country (F), this cloth will also cost 100
grains; because to procure a coin of 92 grains of the country (F), (E)
must pay 8 grains for the coinage, which raises the price of the cloth
to 100 grains.

[Sidenote: A wrong balance of trade raises the price of bullion to the
           value of coin,]

Let us now suppose, that for a certain time the country (F) has absolute
occasion for the cloth of the country (E). The merchants of (F) who
carry on this trade, must send bullion to (E) to pay for this cloth. But
the merchants of the country (F) who deal in bullion, perceiving the
usefulness of it for this trade, will then raise the price of the 100
grains of it above the 92 grains in coin (the common market price of
bullion before this trade was known) and according to the demand made
for the foreign cloth, the bullion will rise in the country (F), until
100 grains of it become exactly worth 100 grains in coin. The bullion
can never rise higher; because at that period, the coin itself will be
exported for bullion; and the country of (E) will accept of 100 grains
in their coin as willingly as in any other form. Nor will it ever fall
lower than 92 grains; because the mint in the country (F) is always
ready to give that price for all the bullion which is brought to be
coined.

Here then is a case, where the coin is made to lose all its advanced
price as a manufacture, and this is owing entirely to its being a metal
as well as a money of accompt.

Now as the coin has lost this additional value, by a circumstance purely
relative to itself as a metal, there is no reason why other merchandize
should sink in value along with it.

[Sidenote: and ought to raise proportionally the price of commodities.]

The consequence, therefore, of this revolution ought to be, that as the
merchandize, _bullion_, has got up 8 _per cent._ with regard to the
coin, and as the price of all merchandize ought to be in proportion to
the grains of bullion to which that price amounts, the revolution having
annihilated the 8 _per cent._ advance upon the coin, ought to have the
same effect with respect to prices as if coinage were given gratis, as
in the country of (E); that is, the yard of cloth ought at this time to
cost, in the country of (F), 100 grains, either of coin or bullion,
since they are of the same value.

Farther, in proportion as this demand for bullion comes to diminish,
that is to say, in proportion as the balance of trade becomes less
unfavourable to the country of (F), in the same proportion will coin
rise in its price, when compared with bullion; and when the country of
(E), in its turn, comes to have occasion for the country of (F), then
(E) must pay as formerly for a yard of cloth 92 grains in bullion, and
the remaining 8 grains to have it coined; in which case, the yard of
cloth will fall to the old price of 92 grains in coin, and will stand at
100 grains in bullion as before.

Did the price of a manufacture rise and fall as has been here
represented, it is plain that these variations would be constantly
determined by the proportion of the grains of the metals it costs to
acquire the coin which is the price of the manufacture.

We have seen that upon the institution of coinage and seigniorage, the
yard of cloth fell to 92 grains; because then it was impossible to
procure coin at a less price than 8 _per cent._ but when the balance of
trade had sunk the coin to the value of bullion, then the 92 grains of
the _coin_ being to be purchased with 92 grains of _bullion_, it was
reasonable that the cloth should rise to its former price; because then
no body could say that the coin of 92 grains had cost 100 to procure it.

But this theory does not hold in practice, nor can it possibly hold, as
long as the greatest part of a people are ignorant of, and even do not
feel the revolutions we have been here describing.

[Sidenote: How traders obstruct the operation of these principles, while
           the balance of trade continues fluctuating,]

The price of bullion is entirely regulated by merchants, who have the
whole correspondence in their hands. It rises and falls in countries
where coinage is imposed, in proportion to the state of the balance of
trade at the time. The smallest rise or fall in the demand for bullion
in the market, is immediately marked by the price of it, and that ought
(by the principles we have been laying down) to regulate the rise and
fall of every commodity. But this is by no means the case. Commodities
rise and fall only after a certain time; and of this interval merchants
will constantly profit. Does the price of bullion rise, they immediately
sell to strangers as if all prices were immediately risen; but with
regard to manufacturers, they hide the revolution with great care, and
preserve prices from rising, until the competition among themselves
discovers the secret. Does the price of bullion fall, they do all they
can to keep up the prices of every commodity which they sell to
strangers, until the competition among themselves obliges them to bring
them down; and with regard to manufactures, they are all in one interest
to reduce the prices in proportion to the fall of the bullion, which
works its effects by slow degrees.

[Sidenote: and how an overturned balance of trade attaches prices to the
           denominations of coin.]

These are the operations of traders, in times when there is a
_fluctuation_ in the balance of the trade of a country; that is to say,
in times when the balance is sometimes favourable and sometimes not.

At such times the true influence which trade ought to have upon prices
is never exactly known, but to the merchants, who seldom fail to profit
of their knowledge, in place of communicating it for the benefit of the
society. But that is not the case when the balance of trade is quite
_overturned_, that is, when it remains for a long time against a nation,
without any favourable vibration; as we shall presently explain.

We have seen how, by the changes in the balance of trade, the price of
bullion is made susceptible of a variation in its value, equal to the
price of coinage; and we have pointed out the principle which confines
the variation within certain limits; to wit, the value of the coin as a
metal, which prevents bullion from rising higher; and the mint price,
which preserves it from falling lower.

We have observed how merchants may profit of such variations, and how
they obstruct the operation of principles upon the rise and fall of
prices. We now proceed to another chain of causes, which tend greatly to
destroy the due proportion of value between coin and merchandize. This
with justice may be put also to the account of the imperfection of the
metals in performing the functions of money of accompt.

Universal experience shews that the prices of merchandize are so
attached to the denominations of coin, that they do not fluctuate as
principles point out, any more than projectiles describe parabolas, or
that machines operate the effects, which by calculation they ought to
do. The resistance of the air in one case, the friction of the parts in
the other, tend to render theory incorrect. Just so here, our theory
represents prices as rising and sinking in the most harmonious
proportion together with the metals; but in practice it is not so. They
have their frictions and political resistances, which only render the
theory delusive when every circumstance is not combined. A good gunner
must calculate the resistance of the air upon his bomb, or he never will
hit the mark.

We have already shewn how the interests of mercantile people tend to
obstruct the due fluctuation of prices; we must now take in other
combinations.

Although this be not a proper place to resume a discussion of the
particular theory of the rise and fall of prices, yet still something
must be said upon that subject, in order to bring the question we are
upon to some sort of solution.

[Sidenote: How profits consolidate into prime cost,]

First then, it will be agreed that it is far easier to make a price
rise, than to make it fall. I believe I might take this for granted,
without giving the reason for it. At all times, a price which has long
stood low, may be made to rise; but it is next to impossible to make a
price which has long stood high, to fall in the same manner. Here is the
reason: Let me suppose the yard of an extensive manufacture which
occupies a number of hands, to be worth 100 grains. The workmen here
live nearly at the same expence, and I suppose them to live upon the
profits of their work, when they sell at 100 grains a yard. The price
rises to 120; here is an additional profit of 20 grains. If a sudden
turn should diminish the demand which raised the price of the
merchandize, it will fall to the old rate without much difficulty; the
workmen will consider the 20 grains addition as a precarious profit upon
which they cannot reckon: but let the price of 120 grains remain
uniformly for some years, the 20 grains will cease to be precarious
profits; they will consolidate, as we have called it, into the value of
the merchandize; because the workmen, by having long enjoyed them, will
have bettered their way of living; and as they are many, and live
uniformly, any thing which obliges them to retrench a part of their
habitual expence, is supposed to deprive them of necessaries.

[Sidenote: and are preserved upon articles of home consumption,]

This is sufficient, as a hint, upon a subject which branches out into an
infinity of different relations, not at all to the present purpose. But
it is very much to the purpose to shew how the imposition of coinage
must, on many occasions, have the effect of attaching the price of
commodities to the denominations of the coin, instead of preserving them
attached to the grains of the metals which compose them, as in theory
they ought to be.

When wars, _e. g._ occasion a wrong balance to continue for many years
against a nation, this keeps coin at par with bullion for a long time.
Is it not very natural, that during that time manufacturers should
estimate their work according to the coin, and not as formerly,
according to the bullion? The consequence of this is, that when peace
returns, and when coin begins to rise above the price of bullion, the
manufacturers stick to the denominations of the coin, instead of
descending in value (as they ought to do by theory) along with the
bullion. What is the consequence of this? It is that the prices of
manufactures _for home consumption_, and of _commodities peculiar to the
country_, stand their ground; that is, prices do not descend, and cannot
be brought down by merchants.

[Sidenote: but are torn away by foreign competition for articles of
           exportation.]

But as to manufactures for exportation, which are not peculiar, but
which are produced by different countries, their prices are violently
pulled down by foreign competition; and the workmen are forced to
diminish them. This hurts them effectually, not because of the
diminution of the prices; because, properly speaking, this diminution is
only relative to the denominations of the coin; their gains will
purchase as many grains of bullion in the market as before, but not so
much coin, and consequently not so much of any commodity which, by the
principles just laid down, have attached themselves to the denominations
of the coin, and have risen in their price along with it.

From this short exposition of a very intricate matter, we may conclude,
that the imposition of coinage does not raise the price of such
merchandize as is in common to several nations, and which trade demands
from each, without any competition with the natives; that is to say, the
prices of them stand as formerly with respect to strangers; because
although the prices be made to sink at home, with respect to the
denominations of the coin, yet strangers, being obliged to pay for them
in those denominations, are also obliged to pay an advanced price for
the coin, in order to procure them. This is the price of coinage. This,
I confess, is a little subtil, but I believe the reasoning will be found
just.

On the other hand, when trade extends itself to other commodities, to
those, I mean, which it buys in competition with the natives (and which
are made to rise and fall from the vicissitudes of inland demand) or to
such commodities as are peculiar to the country; in these cases, I have
little doubt but the prices, once raised and continued high for some
time, attach themselves to the denominations of the coin, and rise along
with it; that is to say, coinage is included over and above the price
which the merchandize would have born had no coinage been imposed.

[Sidenote: How this hurts the industrious, and how the state may
           indemnify them.]

The conclusion I draw from this reasoning, is, that the imposition of
coinage has not, in fact, the effect of reducing the prices of
commodities to fewer grains of bullion than before, excepting those of
such commodities as are sold in competition with other nations; and even
then it may be said, that it is not the imposition of the coinage, but
the competition with strangers, which reduces them to the minimum of
their value, as well as the profits of those who work in them, to the
minimum of a physical necessary. This last circumstance shews why those
who work for foreign exportation, are the poorest class of all the
industrious of a state, but the most useful to it, at the same time. I
believe experience supports the truth of these conclusions. I shall here
by the bye observe, that as the state is made to profit by the
diminution of the profits of this most useful class; as she receives the
coinage which strangers pay, and which is really deducted from the
manufacturers who support exportation, she ought to indemnify this class
(as may be done in a thousand ways, by premiums, for example, upon
exportation) out of the profits arising upon coinage, instead of making
coinage free, to the evident loss of the nation, and benefit to
strangers, as we shall now endeavour to prove.


------------------------------------------------------------------------


                               CHAP. II.
 _Concerning the Influence which the imposing the Price of Coinage, and
 the Duty of Seigniorage in the English Mint, will have upon the Course
               of Exchange, and Trade of Great Britain._


[Sidenote: Theory of prices upon articles of exportation.]

In the preceding chapter we have examined a very nice theory, into which
such a number of circumstances have been combined, depending upon facts,
that little stress is to be laid upon several conclusions which have
been drawn from it, unless they be approved by experience.

Let the best workman in London make a watch, he cannot depend upon its
being a good one, until it be tried; and when that is done, the
application of his theory will enable him to discover all the defects
and irregularities in the movement. It is just so in political matters.
The force of theory is not sufficient to form a good plan; but it is
useful for discovering many faults which would not have been foreseen
without it. The more extensive, therefore, any theory is made, the more
it is useful for these purposes. It is proper only to observe that the
more complicated any principle of it is, the less dependance can be had
upon its operation when applied to practice.

It is impossible to lay down a distinct theory for the rise and fall of
the prices of all sorts of commodities in a nation such as Great
Britain. All that can be said with certainty, is, that competition on
the part of the consumers will make them rise, and that competition on
the part of the furnishers will make them fall. Now the competition
among the furnishers may be reduced to theory; because it is fixed
within determinate limits, which it cannot exceed, and is influenced by
this principle, viz. that when profits are reduced to the minimum (that
is to the exact physical-necessary of the workman) all competition among
furnishers must cease.

But the competition among consumers is fixed within no determinate
limits: some demand to satisfy physical wants; others those of vanity
and caprice. Most inland demand for consumption is of this kind, and
consequently it is impossible to foresee what effect the imposition of
coinage will have upon the prices of many commodities. Perhaps they will
fluctuate with bullion; perhaps they will adhere to the denominations of
the coin: experience alone can bring this matter to light.

But with regard to such commodities as are the object of foreign trade,
prices are influenced by certain principles on both sides. Merchants,
not the consumers themselves, are the demanders here. Neither vanity or
caprice, but profit, regulates the price they offer. Thus it is, that as
all competition among furnishers must cease upon the reduction of
profits to the minimum, so all demand from merchants (who in this case
represent the consumers) must cease, so soon as prices rise above what
they can afford to give, consistent with their minimum of profit upon
the sale of what they buy.

The degree, therefore, of foreign competition will alone regulate the
prices of several exportable commodities, and of consequence the profits
of such as are employed in them, as has been said. This premised, we
come to examine the influence which the imposition of coinage would have
upon the course of exchange and trade of a nation.

[Sidenote: How the course of exchange is regulated.]

In speaking of exchange, so far as it influences the decision of this
question, we must throw out all extraneous circumstances, and endeavour
to reduce it to the plainest theory.

When one nation pays to another the price of what they buy, the
interposition of bullion is unavoidable; and the whole operation
consists in comparing the value of coin with the value of bullion in the
one and in the other.

[Sidenote: Price of exchange what?]

Suppose France to owe to England 1000 pound sterling; what regulates
exchange here, is the price of bullion in Paris and in London. The
French merchant inquires first, what is the quantity of bullion in
London, which at that time is equal to the sum he wants to pay? And
next, what that quantity of bullion costs to procure in the Paris
market? Upon this the par of exchange ought to be regulated. Whatever is
given more than this quantity is the price of transportation, when the
balance of trade is against France. Whatever is given less, may be
considered as the price of transportation which the English would be
obliged to pay were the balance against England, if the French merchant,
by sending his paper to London, did not save them the trouble, by
diminishing so far the balance against them; and of this he profits,
until the balance turns to the other side. Now let us leave the price of
transportation out of the question, and consider only how the imposition
of coinage, by affecting the price of bullion, may influence the course
of exchange.

[Sidenote: Where coinage is free the price of bullion ought to be
           invariable,]

We have seen how the imposition of coinage renders the price of bullion
susceptible of a variation in its price, equal to the amount of the
imposition. Wherever, therefore, coinage costs nothing, there bullion
and coin must always be of the same value. This would be the case in
England, without doubt, were the metals in the coin exactly
proportioned, were all the coin of a legal weight, and were neither
melting down, or exporting made penal.

[Sidenote: and fluctuating where coinage is imposed.]

The bullion, therefore, in France may vary 8 _per cent._ in its price,
according to the balance of trade; the bullion in England must be
supposed invariable, let the balance stand as it will.

[Sidenote: Bullion in England dearer than in France,]

According to this representation of the matter, may we not say, that
bullion in England is always at the highest price it ever can be in
France, since it is at the price of the coin? Is not this the condition
of France, when the balance of her trade is the most unfavourable it
possibly can be?

[Sidenote: because the price of it is kept up by the mint,]

If therefore England, _herself_, contributes to keep the price of her
bullion higher than it is in France, is not this an advantage to France,
since France can buy the bullion with which she pays her English debts
cheap in her own market, and can sell it dear in that of her creditor?
Is there not a profit in buying an ox cheap in the country, and selling
him dear in Smithfield market?

[Sidenote: and is allowed to fall in France 8 per cent. below the coin.]

Now why is bullion sometimes cheaper in France than in England? I
answer, that in France it is allowed to fall 8 _per cent._ below the
coin, and the King only takes it at times when no body can get a better
price for it: and that in England the King gives always coin for
bullion, and by that keeps the price of it from ever falling lower. Let
the English mint pay the pound troy standard silver at the rate of
thirteen ounces of coin, the price of bullion in England will always be
1⁄13 dearer than the coin.

When bullion in France falls to 8 _per cent._ below the coin, it is
carried to the mint: when it is worth more no body carries any to be
coined.

[Sidenote: The wise regulation.]

No body in France (except upon a general coinage) is forced to sell
their bullion at this price. Is it not, therefore, a very wise
regulation, to permit the operations of trade to reduce, as low as
possible, the value of that commodity with which all they owe is paid,
and this more especially, as the fall of its price is a proof of the
prosperity of their trade.

If, therefore, it be supposed, that the effect of having a material
money for a scale of value, is, that the denominations in the coin, and
not the grains of the bullion, must measure the value of commodities
_for home consumption_; then it follows, that the variations in the
price of bullion, should not affect the price of commodities.

This is a question, however, which I do not pretend to determine, and I
apprehend that nothing but experience can resolve it.

[Sidenote: England loses by this sometimes 8 per cent. upon her trade
           with France.]

Now let me consider the difference there is between the trade of France
and that of England as matters now stand; and what would be the case,
were the regulations of the mint the same in both countries.

I shall suppose that England buys of French goods as much as may be paid
with one thousand pounds troy weight of English guineas. I ask for what
weight of French louis d’ors must France buy of English goods to make
the balance even? Will it not be answered (according to the ordinary
method of calculating the true par of exchange) that if France buys for
one thousand pounds troy of her louis d’ors (supposing the guineas and
the louis d’ors of the same fineness) that the balance is even?

Is it not true, that England must send this thousand pounds weight
either in gold bullion or in guineas, and is it not the same thing to
the English merchant to send the one or the other, providing the guineas
be full weight?

But when France comes to send the thousand pounds weight of her louis
d’ors, she finds at market a thousand pounds weight of gold bullion 8
_per cent._ cheaper, and this bullion is as good to the Englishman as if
he had got the louis d’ors.

Let me state the case otherwise. Suppose France buys in England for 1000
pounds weight of her guineas in Virginia tobacco; and that England buys
in France for 1000 pounds weight of her louis d’ors of Bourdeaux claret.
Is not this called par? Will not France pay her debt to England with
1000 pound of gold bullion? Whereas England must pay 1080 pounds to
France; because 1000 pounds weight of her louis d’ors, is worth in
France 1080 pounds of any bullion of the same standard. The 1000 pounds
then compensates the 1000 pounds; the 80 pounds over must be sent to
France, and the carriage of this quantity only, must be paid for
according to the principles of exchange.

Here is evidently a balance of trade against England of 8 _per cent._
above the real par of the metals. Will any body say that the 8 _per
cent._ is paid for the transportation of 80 pounds of bullion due?
Certainly not.

Now if the English should declare that they, for the future, would coin
neither gold or silver bullion for any person, but at the rate of 8 _per
cent._ below the value of the coin; and if it be true, that this
regulation would have the effect of linking the price of bullion, on
many occasions, to 8 _per cent._ below the coin; in that case, would not
the English and the French acquit their debts of the 1000 pounds weight
of their respective coin upon the same conditions? In this case, would
not the price of exchange vanish, since there would be no bullion to be
sent by either party? But in the first case, would not England be
obliged to send 8 _per cent._ above the quantity of gold bullion she
received from France, and would not the transportation of this cost
money, and would not this transportation be marked by a certain price of
exchange, and consequently, would not the price of exchange rise against
England?

But to this it is objected, that by the former example, the exchange
marked 8 _per cent._ against England with great reason; because it is
plain, that there is a balance of 8 _per cent._ against England, since
she has sent that proportion over to France in bullion. Very true. But
had England, instead of taking to the value of 1000 pounds weight of
louis d’ors in claret, taken only for 100 pounds weight, the exchange
would have still marked 8 _per cent._ loss; because the 100 pounds of
louis d’ors must be paid with the 108 pounds of bullion, although
England by this trade has evidently gained 892 pounds of bullion, which
France must send her as a balance.

As matters of fact, when they can be procured, tend greatly to confirm
theory, by forming a solid basis whereupon to reason, I shall here
profit of one which has fallen into my hands, and by applying it to the
present question, endeavour to give some additional force to this
reasoning.

[Sidenote: and at a medium 4 per cent. as is proved by a matter of
           fact.]

Mr. Cantillon, in his _Analysis of Trade_, which I suppose he understood
by practice as well as by theory, has the following passage in his 99th
page.

“The course of exchange between Paris and London since the year 1726,
has been at a medium price of 32 pence sterling for the crown of three
livres; that is to say, we pay for this French crown of three livres, 32
pence sterling, _when calculated on gold_, when in fact it is worth but
thirty pence and three farthings, which is giving four pounds in the
hundred for this French money; and consequently, upon gold, the balance
of trade is 4 _per cent._ against England in favour of France.”

In this place, Mr. Cantillon calculates the par of exchange according to
the common rule, to wit, gold bullion against gold bullion in the coins
of both nations, where both are of legal weight; and he finds that there
has been, these thirty four years past, a balance of 4 _per cent._
against England.

Now according to my theory, this is exactly what the coinage in France
ought to produce, supposing on an average that the trade had been at
par. Here is the reason.

The coinage in France costs 8 _per cent._

When the balance of trade is favourable for France, coin is worth 8 _per
cent._ above bullion.

The proof is plain. Were it not 8 _per cent._ above bullion, no man
would ever carry bullion to the mint; because the mint price is 8 _per
cent._ below that of the coin.

When the balance of trade is against France, coin must fall nearly to
the price of bullion.

Supposing then that the balance of the trade of France (at a medium of
thirty four years) is found to have been at par, will it not follow,
that at a medium also of these thirty four years, French coin must have
been at 4 _per cent._ (the half of the coinage) above bullion?
Consequently England having taken merchandize from France, and France
having merchandize from England, for the same weight and fineness in
their respective coins, must not England have been obliged to send to
France 4 _per cent._ more bullion in order to pay the coinage? This
reasoning appears conclusive to me, who am no merchant, and who do by no
means pretend to a perfect understanding of those affairs; but I think
this circumstance is at least of sufficient importance to make the
matter be inquired into. For this purpose, I shall suggest a method of
making the discovery.

[Sidenote: Easy to be verified at all times by the price of bullion and
           course of exchange in the Paris market.]

If it shall be found, that English draughts on Paris, or French
remittances to England, shall at any time occasion bullion to rise in
the market of Paris above the mint price, will it not be allowed that
such a circumstance demonstrates that the balance of trade is then in
favour of England? If at that same time it shall be found, that exchange
(when reckoned upon the gold as Cantillon has done) is against England,
will it not be a demonstration of the truth of what I have here
suggested as a question worthy of examination?

[Sidenote: When bullion is exported to England, exchange is against
           France.]

For if the balance of trade be against France, so as to make her buy
bullion to send to England, this is a proof that she owes England a
balance; and if at the same time the English are paying above the
intrinsic value of the metals (in their respective coins) in what they
owe to France, that additional value cannot be paid by England as the
price of exchange, or to pay for the transportation of their bullion,
but to pay the French creditors the additional value of their coin above
the price of bullion.

[Sidenote: Course of exchange no rule of judging of the balance of
           trade, but only of the value of coin.]

May we not also conclude, that in a kingdom such as England, where
coinage is free, the course of exchange is no certain rule for judging
of the balance of trade with France; but only of the value of French
coin above French bullion. All authors who have written upon exchange,
represent the advanced price given upon bills above the intrinsic value
of the coins, to be the price of carriage and insurance, &c. in which
case exchange, no doubt, _may_ mark the balance of trade; but if an
advanced price must be given in order to put bullion into coin, or in
other words, if the metals in the coin are worth 8 _per cent._ more than
any bullion of the same fineness, is it not evident that a nation may be
drawing a great balance of bullion from another, although she be, at the
same time, paying 8 _per cent._ above the rate of bullion in the sums
she repays to the nation which is her debtor upon the whole; that is to
say, although she be paying above the real par of exchange, _as it is
commonly calculated_.

If it be here objected that this cannot be the case, because when the
balance of trade is against the nation which imposes coinage, their coin
falls to the price of bullion: I answer, that a balance may be against
such a nation, without producing so great a fall in the coin. Coin is
reduced to the par of bullion only when the balance is at the height
against a nation, and when it has remained so for a long time. Who would
give coin at a discount of 8 _per cent._ if there was a prospect that in
a few days, weeks, or even months, it was to rise to its former value?

These are the reasons which engaged me, in a former chapter, to lay it
down as a rule, that trading states should endeavour, as nearly as
possible, to observe the same regulations with their neighbours, in
every thing relating to their coin. It is also in order to facilitate
such a regulation, that I shall insert, at the end of this book, a very
particular state of the French coinage, and of what I can gather with
regard to that of Holland.

[Sidenote: The real par not to be calculated by the intrinsic value of
           the coin, unless bills were drawn in weight of fine bullion.]

From what has been said, it appears that the common method of
calculating the real par of exchange is not correct, since it is
calculated by comparing the quantity of fine bullion in different coins,
and attributing the difference between the bullion paid for the paper,
and the bullion received in payment of it, as the price of
transportation. This, I say, is by no means correct; nor is it possible
it should be so, unless bills of exchange were specified in the weight
of fine bullion, instead of being specified in the denominations of the
coin: an example will make this plain.

Were a merchant in London to ask of another who has a correspondence in
Paris, to give him an order for a hundred yards of Abbeville cloth, and
to offer him, in exchange, the same quantity of cloth of a worse
quality, would not the merchant to whom the proposal is made,
immediately calculate the value of both commodities, and demand the
difference of the value between what he was to give, and what he was to
receive? Could ever this difference be considered as any thing else than
the difference between the real worth of the commodities? But were they
to exchange at London an hundred pounds of fine silver bullion, for the
same weight at Paris; then if the merchant demanded one grain more than
he was to give, it must be upon the account of transportation; because,
weight for weight, there is not the smallest difference between equal
weights of the fine metals.

Bills of exchange, then, being all conceived in denominations of money
of accompt, realized in coin; and coin changing in its value with regard
to bullion; it is evident that the real par cannot be computed upon the
bullion alone contained in the coin.

[Sidenote: Obj. Exchange regulates the price of bullion.]

If it is objected, that since it is the course of exchange which
regulates the price of bullion, all variations between bullion and coin
ought to be ascribed to that cause.

[Sidenote: Answ. Denied: exchange only raises its price; the mint price
           pulls it down.]

I answer, that it is not the course of exchange which regulates the
price of bullion; but exchange makes it ascend from the price to which
it is regulated.

[Sidenote: Balance upon the real par, no mark of a balance upon trade;
           proved by examples.]

The mint price regulates the price of bullion; and there it will nearly
stand, while the balance of trade is either at par, or favourable to a
country. Exchange therefore, or a wrong balance, can only make it rise;
and it returns to where it was, by the force of another principle.

In the next place, were I to allow that the balance of trade regulates
the price of bullion, it would not follow that what is called the _real
par_ of exchange is a rule to judge of the _balance of trade_ of a
nation. Is it not plain, that if France, for example, being at present
obliged to send great sums into Germany, upon account of the war (_anno_
1760,) has reduced the price of her coin to a par with bullion, that all
nations will profit of it as much in their trade with France, as if the
balance was become favourable to them; since the course of exchange will
then answer according to the conversion of bullion for bullion in all
remittances to France.

But were France at present to remit money to any other country, which
has the balance favourable, and where coinage is paid, suppose to Spain,
while the balance between France and Spain is supposed to be exactly
even; would not the real par between the money of Spain and of France
mark an exchange against France, for the value of the coinage imposed by
Spain? This is the reason why, in time of war, exchange between France
and England appears more favourable to England than in time of peace.
But does this anywise prove that the balance of trade is then more in
favour of England? by no means: for let me suppose the balance of their
trade to remain the same after the peace as at present; is it not
evident, that in proportion as the coin of France shall rise above the
bullion, that the _balance of trade_ will become, in appearance, against
England?

[Sidenote: Balance of trade, what?]

By the _balance of trade_, I here constantly understand a certain
quantity of bullion sent by one nation to another, to pay what they have
not been able to compensate by an exchange of their commodities,
remittances, &c. and not that which they compute in their bills as the
difference between the respective values of coin and bullion in both
countries.

How, then, is the real par of exchange to be regulated, so as to
determine which nation pays a balance upon the exchange of their
commodities?

[Sidenote: The real par of exchange to be fixed by the fluctuating value
           of the coin, not by the permanent quantity of the bullion it
           contains.]

I answer, To determine that question, let bullion over all the
commercial world be stated at 100, and let coin in every country be
compared with it, according to the current price. In England, for
example, (were all disorders of the coin removed) coin must always be as
100. In France, when the balance is favourable, at 108.27. In Germany
(were the Emperor’s late regulation with Bavaria to be made general) at
101. And so forth, according to the price of coinage imposed every
where. These advanced values above the 100, never can rise higher; and
the more the balance of their respective trade is unfavourable, the
nearer they will severally come to 100; below which they never can fall.
These fluctuations will constantly be marked in exchange; because all
circumstances are exactly combined by merchants; but the _balance of the
trade_ will only be marked _by what exchange is made to vary from these
proportions_.

[Sidenote: Proof of this proposition.]

Let me suppose the trade of France favourable upon the whole, by great
commissions from Cadiz, and bullion at the same time to be carried to
the mint at 8 _per cent._ below the price of coin.

Let me suppose, that upon all the trade of England with France, there
shall be, at that time, a balance of 2 _per cent._ sent from France to
England in bullion; and upon the trade with Germany a balance of 1 _per
cent._

I say, that the _par of exchange_ between England and France is 8 _per
cent._ against England; and that the _par of exchange_ between Germany
and France is 7 _per cent._ I state it at this rate; because the balance
being supposed favourable for the three nations, the value of their coin
with respect to their bullion ought to be in proportion to the mint
price.

The _course of exchange_, therefore, if it be a rule to judge by, ought
to mark 6 _per cent._ against England; which I say is 2 _per cent._ in
her favour: and the exchange with Germany ought to mark 6 _per cent._
against Germany; which I call 1 _per cent._ in her favour.

An example will make this plain.

Suppose English guineas, German carolins, and French Louis, to be all of
the same weight and fineness; I say, the _real par_ in the example we
have stated is, between Paris and London, 100 Louis are equal to 108
guineas; because the 100 Louis are worth 100 guineas in London, and 108
guineas are worth no more than 100 Louis in Paris. Again, between Paris
and Francfort, 100 Louis are equal to 107 carolins; because 108 carolins
are worth at Paris 100 Louis; and 101 Louis at Francfort are worth 100
carolins; consequently, the difference between 7 and 8 is the _real
par_, to wit, 100 Louis for 101 carolins. Next, as to the par between
London and Francfort, here 100 carolins equal 101 guineas; because 100
carolins in London are worth 100 guineas; and 101 guineas at Francfort
are worth no more than 100 carolins.

Now in the ordinary way of reckoning the _real par_, the 100 Louis, 100
carolins, and 100 guineas, are all supposed to be of the same value, in
the three markets; and the difference between this supposed value, and
what is paid for it, is supposed to be a loss upon trade. In this light,
the nation’s loss resembles the loss incurred by him, who, when he goes
to the bank, and pays ten pounds sterling in coin, for a bank-note,
says, that he has given ten pounds for a bit of paper, not worth one
farthing; reckoning the value of the note, at the real par of the paper
it is writ upon.

The general rule, therefore, as I apprehend, is, to settle the real par
of different coins, not according to the _bullion_ they contain, but
according to the bullion they can buy with them in their own market at
the time.

If 1000 pounds weight of guineas can purchase at London 1000 pounds
weight of standard bullion; and that 1000 pounds of the same weight of
Louis can buy at Paris 1080 pounds weight of the same standard bullion;
then the 1000 pounds weight of guineas is at the real par with 9256⁄1000
pounds weight of the Louis, and not worth 1000, as is commonly supposed.

If the doctrine laid down in this chapter be found solid; if no
essential circumstance has been overlooked, which ought to have entred
into our combinations, (points left to the reader to determine) then we
may conclude,

_1mo_, That the course of exchange, in the way people take to calculate
the real par, is no rule for judging of the balance of trade.

_2do_, That the great duty laid upon the fabrication of the French coin,
either deceives the English nation, and makes them conclude, from the
course of exchange, that their commerce with France is extremely
disadvantageous: or, if it be really disadvantageous, that it is the
imposition of a duty on coinage in the French mint which occasions it.

It is a question belonging to the theory of commerce, and not to that
which we are now upon, to examine the nature of a disadvantageous trade,
and to investigate the principles pointing out the commodities which
every country ought to encourage for exportation, and those which are
the most profitable to take in return.

[Sidenote: Application of these principles to the English trade with
           France.]

Upon these principles the trade of England with France must be examined,
and upon examination it will be found whether that trade be advantageous
or hurtful. Here the question is reduced to this; Whether from the
course of exchange it may be concluded that the balance of trade is
against England, because the French crown is commonly paid with
thirty-two pence sterling? We have decided that it cannot. If there be
no other objections against the trade of France but this loss upon
exchange; and if it be true that this is no proof of trade being against
England, but only the consequence of her free coinage; then it will
follow, that England may lay as many restrictions, duties, and clogs,
upon the French trade, as she pleases, and may even reduce it to
nothing, without ever removing the cause of complaint; while at the same
time she may be ruining a trade, which pays her upon the whole a great
balance, and upon which trade she has it in her power, by following a
different system in her mint, to render her exchange as favourable as
with any other nation in Europe.

This point seems to be a matter of no small importance to England; since
(from a mistake in point of fact, into which she is led from a delusive
appearance) a very lucrative trade, when considered by the balance it
produces, may, upon false principles, be proscribed as disadvantageous.

These questions, however, are not as yet considered as entirely
discussed, and they shall be a little farther examined in the following
chapter.


------------------------------------------------------------------------


                               CHAP. III.
_Is the loss which the course of exchange marks upon the trade of Great
                 Britain with France real or apparent?_


[Sidenote: Reason for proposing this question.]

Questions are here proposed, which I do not pretend to resolve; all I
aim at is to discover how they may be resolved.

If this inquiry shall prove an incitement to men of better capacity to
review the same subjects, who have more extensive combinations, more
experience, and better information as to facts, in that respect it has
some degree of merit.

[Sidenote: Suppositions.]

I answer to the question proposed, that if the imposition of a duty on
coinage in England would have the effect of rendring her trade with
France more lucrative, then the loss marked by the course of exchange is
real, at least in part; if otherwise, it is only apparent.

[Sidenote: Principles.]

What makes the commerce with any country lucrative, is the balance paid
upon the exchange of their commodities.

What regulates the quantity of commodities taken from any country, in
the way of trade, is the wants of the country demanding; and what sets
the balance even, is the reciprocal wants of the other country. Nations
do not give up correspondence with their neighbours, because these do
not accept of merchandize in exchange for merchandize, but because they
find their advantage in supplying their wants upon easier terms
elsewhere.

Every merchant seeks to sell dear; and the dearer he can sell, the
greater is his profit: that merchant, therefore, must thrive most, who
sells dearest, and who at the same time _can afford_ to sell cheapest.

If an imposition on coinage shall enable England to sell dearer, without
depriving her of the advantage of being able to sell as cheap as at
present, then it will follow, that an imposition on coinage will be
advantageous. If it shall lay her under a necessity of selling dearer,
and deprive her of the possibility of selling so cheap as formerly, then
the imposition of coinage will be hurtful.

[Sidenote: How the paying for coinage affects the profits on goods
           exported.]

These principles premised, as a foundation for our reasoning, let us
first consider the influence of coinage upon the profits on
_exportation_; and then proceed to inquire into the influence it has
upon articles of _importation_.

As to the first, I must observe, that England, as well as every other
country, has several articles of exportation which are peculiar to
herself, and others which she must sell in competition with other
nations.

The price of what is peculiar is determined by the competition of those
who furnish at home, and the lowest price is regulated by their minimum
of profit. The price of what is common is regulated by the competition
of those who furnish from different countries.

If the prices of what is peculiar shall remain, as before, attached to
the denominations of the coin, after the imposition of a duty on
coinage, the competition of those who furnish will remain the same as
before; because prices will not vary; but the stranger, who buys, must
nevertheless pay an advanced price for such merchandize, because the
nation’s coin, with which they are purchased, will be raised in its
value with respect to bullion, the only price he can pay with. This is
the price of coinage: and this imposition has the good effect of
obliging strangers to pay dearer than before, in favour of a benefit
resulting therefrom to the state.

Now, if it be observed that the demand made by the English for goods
peculiar to France, (while these remain in France at the same price as
formerly) does not diminish in proportion as the loss upon exchange
happens to rise; why should we suppose that the demand for goods
peculiar to England should diminish, for a similar reason?

If the rise, however, in the price of exchange should diminish the
foreign demand for such English goods, by raising the price of them in
the foreign market, this, at least, will prove that coinage does not
make prices fall proportionally at home; because, if they should fall,
strangers would buy as cheap as formerly: the prime cost (as it would
appear upon the accounts of their English correspondents) would diminish
in proportion to the loss upon exchange in remitting to England, and
would just compensate it: so upon the whole, the price of the
merchandize would be the same in the foreign market as before.

If the imposition of coinage, therefore, be said to raise the price of
English merchandize in foreign markets, it must be allowed that it will
not raise the value of the pound sterling at home, by sinking the value
of commodities: that is to say, the prices of commodities will adhere to
the denominations of the coin; and the coin bearing an advanced value,
above what it bore formerly, strangers must pay it.

But will not this diminish the demand for English goods? Not if they be
peculiar to England, as we here suppose. But allowing it should, will
not this diminution of demand sink the value of the English coin, by
influencing the balance of trade? If so, it will render remittances to
England more advantageous: consequently, it will recall the demand. The
disease, therefore, in this case, seems to draw the remedy along with
it.

Now what appears here to be a remedy against a disease, is at present,
as we may call it, the ordinary English diet, since it is sinking the
coin to the price of bullion. If, therefore, the having coin always as
cheap as bullion, can be any advantage to trade, the nation is sure of
having it, whenever the balance is unfavourable, notwithstanding the
imposition of a duty on coinage.

[Sidenote: When the balance is favourable.]

Trade has its vicissitudes, and all nations find, at times, that their
neighbours must depend upon them. On such occasions, the balance of
their commerce is greatly in their favour.

Is it not, therefore, an advantage to have a principle at home, which,
upon such occasions, is capable of diminishing with us the value of that
merchandize (bullion) which strangers must give as the price of all they
buy?

[Sidenote: And how, when unfavourable.]

On the other hand, the same principle seems to fly to the assistance of
trade, when the balance becomes unfavourable, as it virtually diminishes
to strangers the price of all our commodities, by raising in our market
the value of that commodity, (bullion) which they must give as the price
of what they buy.

This may suffice, in general, upon exportation. It is a hint from a
person not versed in commerce; and as such it is humbly submitted.

[Sidenote: How the paying for coinage affects the profits on goods
           imported.]

I now pass to the second part of this operation, to wit, the influence
which the imposition of coinage has upon the interests of trade, when
the question is to purchase the commodities of other countries. These
operations are quite different, and in examining this theory they must
be carefully distinguished.

[Sidenote: When the balance is favourable.]

We have seen how the imposition of coinage, during the favourable
balance of trade, procures to the nation an advanced price upon the sale
of her exports. As long as it remains favourable, it must produce the
same good effect with regard to her importations, by sinking at home the
price of the bullion with which she must pay for them. Bullion must
become cheap in the English market, in proportion as the balance of her
trade is favourable, and in proportion as it is cheaper there than in
other nations (with respect to their respective coins) in the same
proportion, the nation has an advantage in paying what she buys, or in
employing her bullion for extending the fund of her own commerce.

[Sidenote: And how, when unfavourable.]

Upon the other hand, should the balance of her trade turn against her,
her bullion rises. This renders the price of all foreign merchandize
dearer to the importers than otherwise they would be; because they must
pay them in bullion. But this loss is at present constantly incurred;
and when incurred, is not _national_, the national loss is upon the
balance of the trade; but whether this balance be paid in bullion at the
mint price, or in bullion at the price of coin, the balance of the trade
is just the same. Now, if this wrong balance (which I here suppose to
proceed only from the imports exceeding the exports upon trade in
general) renders the purchase of foreign commodities dearer to the
merchants, without costing more to the nation; is not this so far
advantageous, that it discourages importations, just at the time they
ought to be discouraged, and thereby may _tend_ to set the balance even
again?

Thus I have endeavoured to analize the influence of this principle in
the four cases; to wit, upon exportation and importation, under a
favourable and unfavourable balance of trade. These different
combinations must always be examined separately, or else obscurity and
confusion will ensue.

We must also observe, that there are still other combinations to be
attended to, although it be superfluous to apply the principles to them;
because the variations proceeding from them are self-evident. I mean,
that this question may be considered as relative to a nation which has
coinage free, with respect to another nation where that duty is imposed.
In this case we may decide, that as far as the situation of the latter
is advantageous, so far must that of the former be disadvantageous, and
_vice versa_.

The question may also be considered in relation to countries who have
either the duty on coinage the same, or different. When they have the
same, there can be no advantage on either side; excepting in this
respect, that the nation which has, upon an average, the balance of
trade in her favour, will thereby render her trade still more favourable
than it would be, were the coinage free on both sides.

[Sidenote: The more trade is favourable, the more adviseable it is to
           impose a duty upon coinage.]

From which we may conclude, that the more a nation has the advantage in
point of trade, the more it is her interest to impose the duty of
coinage. When the imposition is unequal in the two countries, I
apprehend that the country which lays the smallest duty upon her
coinage, may be considered as having it altogether free, and that the
other may be considered as imposing no more than the difference.

Upon these principles must the question here proposed be resolved. They
never can decide as to the matter of fact, to wit, whether the French
trade is hurtful or lucrative: all we are warranted to conclude from
them is, that the trade of Great Britain would be more advantageous with
France than it is, were a duty on coinage to be laid in England as high
as there. In that sense, we may say, that the apparent loss by exchange
is a proof that coin is commonly dearer in France than in England; from
which a loss may be implied; but the loss upon exchange no way denotes
the degree of loss upon the trade, and much less does it certify that
the balance upon the whole is against Great Britain.


------------------------------------------------------------------------


                               CHAP. IV.
_Of the different methods of imposing coinage; and of the influence they
    respectively have upon the value of the money-unit, and upon the
                   domestic interests of the nation._


[Sidenote: Two ways of imposing coinage.]

There are two ways of imposing coinage; one by positive law, and by the
force of that authority which is every where lodged in the legislature;
the other, which is more gentle, renders the imposition almost
insensible, and is effectuated by the influence of the principles of
commerce.

By the one and the other the same end may be obtained; with this
difference, that all circumstances must yield to the force of authority:
and when this is employed, coinage is imposed as a tax upon coin, in
spight of all resistance; whereas, in the other case, the effect takes
place by degrees: it is no tax upon coin; but it is liable to
interruptions; and therefore, upon a general recoinage of all the specie
of a nation, it is not so effectual as the first; although it may answer
perfectly well for supporting a fund of good specie, and for replacing
all the diminutions it may suffer from melting down or exportation.

[Sidenote: Plan laid down in this chapter.]

I shall now give examples of the one and the other method: I shall point
out some of the consequences which attend both: I shall chalk out a
rough draught of the principles, which may be applied in forming a plan
for laying on that imposition in the English mint: and last of all, I
shall shew how the experiment may be made.

[Sidenote: How coinage is imposed by authority.]

Were the government of England to call in, at present, all the coin in
the nation, in order to be recoined, and to fix the mint price of it, as
gold and silver standard bullion, at —— _per cent._ below the value of
the new coin; this would be imposing coinage by positive law; and being
an arbitrary operation upon the coin of the nation, could not fail of
influencing the value of the money-unit.

[Sidenote: How by consent.]

Were the government, on the other hand, to give orders to the mint, to
pay gold and silver bullion for the future, no dearer than —— _per
cent._ below the coin, this would be no arbitrary operation on the coin
of the nation, and would not (as I imagine) influence the value of the
money-unit, although it might sink the price of bullion, by the
influence of the principles of commerce.

The different consequences of these two methods of imposing coinage are
now to be explained.

[Sidenote: When by authority, what is the consequence?]

Were England, during a war, or at any time when the balance of her trade
is unfavourable, to impose coinage by law, in the manner proposed, the
consequence would be, that all the specie in Great Britain, or at least
a considerable part of it, might possibly be melted down, and sold in
the market for bills of exchange. [Sidenote: The metals are exported.]In
a nation of trade, where credit is so extensively and solidly
established, there would, in such a case, be no difficulty to find an
outlet abroad for all the metals in the kingdom; because then every
thing would be considered as profit, which was less than the —— _per
cent._ loss in carrying the coin to the mint.

If it is objected, that this plan has been many times executed in
France, particularly in 1709, and 1726, without any such inconveniences;
I answer, as I have done upon other occasions, circumstances are to be
examined.

[Sidenote: How, in France, this is prevented in some measure.]

Upon such occasions, in France, the coin is ordered to the mint, upon
penalties against those who shall not obey; melting down is strictly
inquired into, and severely punished; all the roads which lead to
foreign countries are beset with guards, and no coin is suffered to be
exported; all debts may be demanded in coin; and all internal commerce
is carried on with specie.

This is a violent method of imposing a tax upon all the coin in the
nation; and the general coinage is made with no other intention. In the
coinage 1709, this tax amounted to 231⁄13 _per cent._ (Dutot, Vol. I. p.
104.)

[Sidenote: French politics, as to coin, not generally understood.]

Under these circumstances, it is very evident, that those who have coin
or bullion must either carry it to the mint, or bury it: there is no
middle course to be followed.

Let me here observe by the bye, how frequent it is to see people blame
the greatest ministers rashly, and impute to them the most absurd
opinions concerning the most simple matters. How much have the ministers
of France been laugh’d at, for pretending to forbid the exportation of
coin, to pay the balance of their trade? They did not forbid the
exportation of the coin for paying of their debts: On the contrary, the
King has sometimes had his bankers, whose business it was to send coin
to Holland for that purpose, as we shall explain in another place. This,
I think, is common sense.

If the ridicule is turned against those states, who forbid the melting
down and exportation of coin, where coinage is free, I must also make
answer, that _there_ the prohibition is laid on, to save to government
the expence of perpetually recoining what is melted down, or of coining
the foreign specie, imported in return for that of the nation which has
been exported without necessity.

Let us next examine the consequence of imposing coinage by law, when the
plan is so laid down (no matter how) as not to be frustrated by the
total desertion of the mint.

[Sidenote: How coinage influences the price of inland commodities.]

Is it not evident, from the principles laid down in the first chapter,
that, in this case, the value of the coin must rise, not only with
respect to bullion, but with respect to every commodity: or in other
words, that the prices of commodities must fall universally with respect
to the denominations of the coin. For who will pay the same price for a
commodity, after he has been obliged to pay —— _per cent._ to purchase
the price with which he must buy? But the moment the great operation of
the general coinage is over, and that trade begins to work its former
effects, while the balance of it is supposed to remain unfavourable, all
prices will return to their former rate, with regard to the
denominations of the coin, by the operation of another principle. The
new coin procured at so much cost will then fall to the price of
bullion; that is to say, all the price paid for coinage will be lost,
and consequently money will return to its former value; or in other
words, prices will be made to rise to their former height; because then
no body will be obliged to pay — _per cent._ to procure the price.

[Sidenote: A case not to be resolved by this theory, but left to be
           verified by experiment.]

Now, it is the effect operated upon prices by the _return_ of a
favourable balance, when coin _regains_ an advanced price above bullion
by the influence of commerce, which my theory does not reach to. I
cannot discover a principle, which can force the prices _of articles of
inland consumption_ to fall and fluctuate with the prices of bullion;
because I find them too closely attached to the denominations of the
coin; and that foreign commerce has not sufficient influence upon them.
As that combination is beyond my reach to extricate, I leave it to the
decision of experiment.

[Sidenote: An objection answered.]

Here a plain objection occurs against what has been said in the twelfth
chapter of the first part, viz. That the wearing of the English coin has
the effect of raising the price of corn in the market, which would be
made to fall upon a restitution of the coin to legal weight. But the
answer is plain. In the former case, the diminution of the value of the
coin was supposed real and permanent; in which case, with time, it works
its effects of raising prices without doubt: but here the augmentation
is not real, and the fluctuations of the value of the coin with respect
to bullion, are both imperceptible to any but merchants, and at the same
time so uncertain, that they have not time to work their effects upon
the price of other commodities.

Were a balance of trade to continue long favourable, and were coin to
preserve, during all that time, the same advanced value with regard to
_bullion_, in that case I have little doubt but the value of that
universal commodity (bullion) in conjunction with the operations and
influence of foreign commerce, might reach inland markets, and reduce
the price of commodities. But this is seldom the case (as I am apt to
believe,) and in proportion as it is so, more or less, will a duty on
coinage influence the price of commodities.

[Sidenote: Coinage affects the price of bullion immediately; and that of
           commodities indirectly.]

Coinage therefore ought, upon many occasions, to be considered as
affecting _immediately_ the price of bullion only, and that of
commodities _indirectly_: whereas the diminution of the intrinsic value
of the coin, by immediately affecting _price_, must consequently affect
the rate of every thing which is given for it.

Let us next examine the consequence of imposing coinage by the influence
of the principles of commerce.

[Sidenote: Consequence of the price of coinage imposed with consent.]

The method here is to leave every one free to do with their coin, or
with their bullion, what they please. Do they incline to melt down or
export the coin, they may have entire liberty to do it: no penalty ought
to be imposed, other than that which will necessarily follow, viz. the
expence of procuring new coin.

In order to make our reasoning here more distinct, let us form a
supposition with regard to a new regulation of the British coin.

The present confusion has convinced every man, that a reformation of the
coin is necessary; and the opinions of those who have writ best upon
that subject seem to be divided upon one main article. The metals are
disproportioned in the coin, the gold being there to the silver, as 1 to
15.21, instead of being as 1 to 14.5. By law, 113 grains of gold are
made equal to 1718.7 grains of silver. One party would have the silver
adjusted to the gold; the other would have the gold adjusted to the
silver. This is the question, in a few words. Now, suppose a middle
course were taken, and that the standard were to be fixed at the mean
proportion of these two values; that is, at the value of the half of
1718.7 grains fine silver, added to the half of 113 grains fine gold;
which, in the first part of this book, we have shewn, by many arguments,
to be the only method of preserving an equality in the money-unit; this
will make the new pound consist of 1678.6 grains of fine silver, and
115.77 grains fine gold: and this is also a sort of medium between the
two opinions.

At that rate, the pound troy standard silver must be coined into 63
shillings and 6 pence, and the pound troy standard gold into 46 guineas,
or pound-pieces, each worth 20 shillings.

Now, if upon both species 8 _per cent._ coinage were imposed, (for as
all this is a pure supposition, it is no matter at what rate the coinage
be stated) then the mint price of the pound troy fine silver must be
fixed at 63_s._ 1¾_d._ and the mint price of a pound troy of fine gold
at 45_l._ 5_s._ ¾_d._ sterling.

[Sidenote: That bullion is brought to the mint when trade is
           favourable.]

Suppose then (as an example) that the mint price of fine bullion should
be fixed at 8 _per cent._ below the coin in England; What principle
could oblige people to carry bullion to be coined?

I answer, When the balance of trade is favourable for England, that
balance must sooner or later be paid in bullion. If trade still
continues favourable, after the first balance is paid, what use can
those who have the bullion make of it, if there be no demand for it to
work it into plate? To export it, by employing it in trade, does not
remove the difficulty; because, while the balance stands favourable,
export as much as you will, more bullion must enter than it is possible
to export, in the way of trade; for we do not suppose that in exporting
it, it is to be given away gratis. The bullion, therefore, not being
demanded for exportation; not being permitted to pass current for money;
and not being demanded for making into plate; must be employed so as to
be profitable to the owner one way or other. For this purpose it must be
lent, or employed within the country for purchasing some sort of effects
which produce an income. For this purpose the bullion must be coined, in
order to render it capable of circulation, and of becoming price.

At all times, therefore, when in a country there is bullion, not
demanded as such, the proprietor carries it to the mint, he sells it at
the mint price; and as this mint price is stated at 8 _per cent._ below
the price of coin, he gives it for the price he can get for it: this he
does without regret, because, if next day he should want to change his
coin into bullion again, he will find it in the market at the same
value.

If it be farther objected, that rather than carry it to the mint at 8
_per cent._ discount, people will lend it to foreigners: I answer, that
if it be lent to foreigners, this lending will turn what we call the
balance of trade against England, and then certainly no body will carry
bullion to be coined; for in which ever way it happens that more bullion
is exported than is imported, in every case the price of exchange and of
bullion must rise; and this is constantly constructed, though very
improperly, as a balance of trade against England; which, to mention it
by the bye, is another reason to prove how ill people judge of the
prosperity of trade by the course of exchange, since the lending of
money, as well as the paying of debts, equally turns exchange against
the country.

Bullion, therefore, never will be carried to the mint, when it can be
disposed of above the mint price; and both theory and experience, over
all Europe, where, England excepted, coinage is imposed, proves, that
bullion is carried to the mint, and sold below the price of coin, weight
for weight of equal fineness.

[Sidenote: How the mint price of the metals may be allowed to vary.]

By fixing the mint price at 8 _per cent._ below the value of the coin,
it is not necessary that this price be made invariable: a power may be
lodged somewhere, by the state, to make deviations from the standard
price. A war breaks out; large quantities of coin are exported; specie
becomes scarce: May not the state, at such a time, deliver coin at the
mint at the current price of the bullion? Let matters come to the worst,
the price can never possibly rise above the present value, to wit, that
of the coin, when it is preserved at its true weight. If peace returns,
and trade becomes favourable, the mint may then be ordered to sink its
price, in proportion to circumstances. In short, the mint may receive
bullion at different prices, at different times, without occasioning the
smallest confusion by such variations in the intrinsic value of the
current specie, which must constantly be the same. It is of no
consequence to any person who receives it, whether the coinage costs
nothing, or whether it costs 8 _per cent._

[Sidenote: Influence of this method of imposing coinage on the price of
           commodities, and value of the pound sterling.]

By this method of imposing coinage, all the advantages reaped by France
may be reaped by England. The bullion will be allowed to fall as low as
with them, when trade is favourable. If it rises, upon a wrong balance,
the mint need not be stopped, in case coin be found wanting for the uses
of the state; and when that necessary demand is satisfied, the mint
price may be reduced again.

I do not see how the value of the pound sterling can be anywise
influenced by this plan of imposing coinage: because the imposition is
not arbitrary; nor can it either add to or take from the mass of the
metals appointed by statute to enter into the coin.

The only possible influence coinage can have upon the value of the pound
sterling, is by lowering the price of commodities. If it has this
effect, I still agree that it is the same thing as if an addition were
made to the metals in the coin. Experience alone will resolve the
question: and if by this it is found that prices are not affected by it,
then we may safely declare, that no variation has been occasioned in the
value of the money-unit, and consequently no injury done to any interest
within the state.

This proposition, however, requires some limitations. The prices of
commodities, certainly, will not be affected _immediately_ by the
imposition of coinage, in the way it has been proposed to lay it on; but
I do not say that, upon some occasions, they may not be affected by slow
degrees.

When the balance of trade at any time has stood long favourable for
England; when the coin has remained long considerably above the price of
bullion; and when, consequently, the mint has been well employed; then
the value of commodities, as has been said, may become influenced by the
operations of foreign commerce, and be sunk in their price. Yet even
here this consequence is by no means certain; for this reason, that what
turns the balance of trade in favour of a nation is the demand which
foreign markets make for her commodities: now this demand, as it raises
the value of her coin above her bullion, so it raises the price of her
commodities, by increasing foreign competition to acquire them.

These combinations are very intricate, and more properly belong to the
doctrine of commerce than to that which we are now upon. I have thrown
them in here, for the sake of extending the present theory a little
farther, and for enabling us to account for appearances which may happen
upon the imposition of coinage, supposing it should be thought proper to
make the experiment.


------------------------------------------------------------------------


                                CHAP. V.
   _How an Experiment may be made to discover with Certainty the real
                 Effects of the Imposition of Coinage._


We have dwelt very long upon this part of our subject, and after all our
endeavours to elucidate the principles which ought to decide whether or
not the imposition of coinage will raise the value of the pound
sterling, in a kingdom which, like Great Britain, is in a mercantile
correspondence with nations where that duty is introduced, we have still
been obliged to leave the final decision of the question to an
experiment.

By that alone it will be clearly discovered, whether coinage will have
the effect, _1mo_, of sinking the prices of commodities, to the
prejudice of manufacturers; _2do_, of raising the price of the pound
sterling, to the prejudice of all the classes of debtors within the
nation; and _3tio_, of hurting trade, by putting England under the
necessity of selling dearer, without being able to sell as cheap as
before: or whether commodities will remain at their former prices; the
pound sterling at the same value; and England be enabled to sell dearer
to foreigners, when her commerce is favourable, without being obliged
upon other occasions to sell one bit dearer than at present.

I shall now give a hint concerning a proper method of making the
experiment.

[Sidenote: The plan of an experiment proposed.]

Suppose peace[1] restored, and a balance of trade favourable to England;
that government shall take the resolution to set about the reformation
of the coin; that they shall publish the plan of reformation three years
before it is intended to commence, according to what was proposed in the
14th chapter of the first part; that they shall make a change in the
mean time upon the regulation of the mint, by ordering all silver coin,
and all guineas, except those of George II. to pass by weight; that
shillings shall be ordered to be coined at 65 in the pound troy; the
mint price, when at par with the coin, remaining as at present with
regard to the gold, and raised to 65 new pence _per_ ounce with regard
to the silver. This, I imagine, will furnish specie sufficient to the
nation, and will make no change upon the value of the pound sterling at
present.

Footnote 1:

  Written in the year 1761.

[Sidenote: The consequence of this will be to recall the old guineas
           from abroad.]

So soon as there shall be a few millions of silver coined free, let the
mint price both of gold and silver be diminished, suppose 4 _per cent._
This, I imagine, will in a short time give an advanced price to coin,
and sink the price of bullion; which will have the effect of recalling
all the guineas of the late King from Holland and Flanders; because coin
being then dearer than bullion in England, people will choose to send
over current guineas to pay their English debts, rather than to remit
bills of exchange. This circumstance will naturally stop the coining of
gold for some time; but if the balance of trade shall continue
favourable, the mint must, in time, be set a-going.

[Sidenote: During this experiment, a close attention must be had to the
           rate of prices.]

During this period, a strict attention must be had to the state of
prices. It is plain, that stopping the coining of gold ought not to make
them sink; since the daily augmentation upon the quantity of the gold
coin from abroad (which will not cost any coinage) will, I imagine, be
sufficient to compensate it. If, therefore, prices shall be found to
sink notwithstanding, this effect must proceed from a combination among
the merchants. An intelligent statesman will quickly discover the true
state of the case.

[Sidenote: And if they vary, how to discover the true cause of it.]

If the sinking of the price is a necessary consequence of the imposition
of coinage, it will perhaps manifest itself by the following symptoms:
_1mo_, The profit of the English merchants upon goods exported will be
the same as before. _2do_, The price of the goods exported will be the
same as before in foreign markets. And _3tio_, Exchange will mark as
many _per cent._ favourable for England as goods will have fallen in
their price at home.

If the fall of the prices be forced, by a combination among the
merchants, their profits will be greater; and very probably no variation
will appear upon the exchange in favour of England.

Let, therefore, the course of exchange be attended to, and by this the
minister will be able to judge, when silver and gold are to be brought
to the mint. The moment exchange, and the price of bullion in the London
market, shall shew that coin is near the full price of coinage above the
price of bullion, then the time approaches when the mint is to be set
a-going.

[Sidenote: Farther consequences of this experiment.]

It is to no purpose to pretend to prognosticate the effect of this
change in the policy of the English mint. Effects it will certainly
produce, which every one will interpret according as their interest may
dictate to them. But the principles of trade are now too well known.
English ministers are too well instructed in the theory of it, and too
sharp-sighted to be deceived by appearances. A trial of a few years will
render the consequences of this innovation perfectly clear; and before
the great reform takes place, the principles will be so well confirmed,
as not to leave a shadow of doubt concerning the course which is best to
be followed.

The silver coined in the interval, at 65 shillings in the pound troy,
may then be rated at its just value, in proportion to the new pound
sterling, and may form a denomination by itself, easily to be
distinguished by the stamp. If it should happen to fall into
inconvenient fractions, let it be called in, and received at the mint
above the rate of other bullion: the loss will not be considerable; and
it cannot be expected that any plan can be proposed which is liable to
none.

Another method is, to coin, during the interval of the three years,
shillings of the weight adapted to the new regulation, and to give them
a value proportioned to the present currency, in the mean time.

In whatever way the experiment be made, by the imposition of the price
of coinage, a great expence will be saved to the state, the expence of
the mint. The national coin will be kept at home, and when exported,
will be preserved from the melting pot. This is the case with the French
coin. Why are louis d’ors worth as much as guineas in many foreign
countries? It is evident that they are not intrinsically worth so much
by 4½ _per cent._ but they are virtually so in the eyes of
money-jobbers; because, being exported from France while coin is fallen
low by a wrong balance of their trade, they still retain an advanced
value, for this reason, that when sent back, upon a revolution in trade,
they are better than bullion, by all the advanced price of the French
coin, at a time when their balance becomes favourable; and for this
reason they are sought for, and are paid for in proportion: whereas any
bullion, or any coin whatsoever, is as good to send to England as her
own proper specie; which occasions the guineas to be melted down without
the smallest regret.

[Sidenote: Can we estimate the wealth of a nation by the quantity of its
           coin?]

It would be a curious inquiry to examine the proportion of money coined
in England and in France, and to compare the quantities coined with the
quantities in existence. People commonly estimate the wealth of a nation
by the quantity of its coined money. Some go farther, and imagine that
the quantity of the coined money is the representation and even the
measure of its wealth. I cannot be of this opinion, for reasons which I
have given in another place; but I shall only observe here, that coin,
like every other thing, is made in proportion to the occasions people
have for it.

The more equality there is between industry and consumption in any
nation, the less coin they have occasion for, in proportion to the
alienations they make; the more a nation is given to penury and
hoarding, their occasions for coin are proportionally greater.

An example will make this plain. Suppose two markets in a country, where
paper does not circulate; that 1000 people come to the one to sell, in
order to buy; that 500 resort to the other, with an intention only to
sell, and 500 others only to buy. In the last example, it is evident,
that there must be brought to market, in specie, the price of all the
goods offered to sale, or else a part must remain unsold: but in the
first case, a much smaller proportion will suffice; because no sooner
has any one sold the goods he has, than he buys from another what he has
occasion for; and so the same money circulates from hand to hand, so
much, that if we suppose every one of the thousand persons to sell for
the precise value of what he buys, every man will carry home the same
sum of money he had in his pocket on coming to market. Those who begin
by selling, will carry home their own coin; those who begin with buying,
will replace what they had with the coin of other people.

In proportion, therefore, to the trucks of commodities for commodities,
money is the less necessary; and in proportion as people sell, in order
to realize, coin is the more necessary. When hoarding was in fashion,
and when lending upon interest was little known, had alienation been as
frequent as at present, the total of coin must have been much greater.
At present no body hoards, where lending at interest is lawful, except
in nations where credit is precarious. This was the case in England
about 1695, and is perhaps the case at present in France[2]. Hoarding
from this motive is more hurtful than from any other: because, at the
same time that it deprives the public of a circulating value, by
preventing the lending of the coin of the nation, it also prevents
bullion from being lent by neighbouring states, and from being carried
to the mint by those who have it at home. Whereas hoarding from avarice
has none of these inconveniences; and when credit is good, there will
always be found coin sufficient; because a demand for it will always
procure it.

[Sidenote: Just as we can estimate a man’s estate by the weight of his
           purse.]

Why is there so little coin in England, in proportion to what there is
in France? Does any man imagine that this is a mark of poverty? By no
means. Let the state proscribe the currency of paper money, the coin
will quickly return; because then it will be demanded. But at present
the paper supplies its place, and so it goes abroad in order to gain
more; whereas in France it remains at home, and produces nothing. The
wealth of a nation can no more be estimated by the quantity of its coin,
than the wealth of private people by the weight of their purse. Were a
person, from that circumstance, to calculate the wealth of the British
courtiers, assembled at the Groom Porter’s, he would find himself
grossly deceived in his conclusions.

Footnote 2:

  In 1760.


------------------------------------------------------------------------


                               CHAP. VI.
  _Miscellaneous Questions and Observations concerning the Doctrine of
                            Money and Coin._


In deducing the principles of every branch of politics, it is of great
importance, at setting out, to treat every one separately; to avoid
intricate combinations of circumstances; and to learn how to distinguish
between the operations of the general principle in question, and the
influence of an accidental circumstance, which may throw the decision of
a particular case upon a principle different from that upon which our
attention is fixed at the time. Let the combination and complication of
circumstances be ever so great, all and every one of them constantly
remain under the influence of one principle or other.

The great art, therefore, is to have the whole plan of the science so
ready at command, as to be able to combine and apply every principle of
it to the case proposed.

From this we discover of what importance it is to be exactly informed as
to facts, and how utterly insufficient the best theory is in the hands
of any person, who is not at the same time a thorough practitioner in
the political science.

In treating of the application of principles to particular cases, we
must constantly go upon this hypothesis, that in the case proposed there
are no unknown circumstances, which may be repugnant to the exact
combination of those which have entred into our supposition.

[Sidenote: The use of a miscellaneous chapter at the end of a subject.]

The use, therefore, of a miscellaneous chapter, after the deduction of
the general principles is over, is to serve as an exercise upon them.
This is done by introducing questions which may tend to illustrate or
explain the matters already treated of, and which have not been
introduced in the body of the work, for fear of rendering combinations
too complicated, and of drawing the attention from the main object of
inquiry. When a particular appearance, also, seems to contradict a known
principle, that appearance may here be analized, and the particularity
of the case pointed out, and ranged under the principle which influences
it. Numbers of objections also occur to readers of such inquiries, and
which even naturally occur to the author himself, although he be obliged
to take no notice of them at the time, for fear of interrupting his
subject; these may properly find a place in a subsidiary chapter. It is,
however, to no purpose to attempt to exhaust any political subject. The
combinations of circumstances are infinite; and therefore people must
content themselves with deducing all the principles by which they may be
resolved, leaving the rest to the reader’s ingenuity.

[Sidenote: Quest. 1. Why does the doctrine of money appear so
           intricate?]

QUEST. I. The first question I shall propose for illustrating this
subject shall be, Whence it comes to pass that the doctrine of money is
so extremely difficult and involved?

[Sidenote: Answ. Because it is perplexed with jargon.]

ANSW. This I ascribe chiefly to the introduction of a money-jargon,
employed by people who have had the management of mints, or who have
been practical merchants, without knowing any thing of the theory of
their business.

[Sidenote: The denominations of coin are confounded with the intrinsic
           value of it.]

As long as money went by weight, and was considered as gold and silver
bullion, the whole doctrine of it remained clear and intelligible: but
the introduction of a numerary value, or denominations of money of
accompt, sometimes attached to one quantity of the metals, sometimes to
another; and the interest of Princes, which made them endeavour to
persuade their subjects that the stamp of the coin was sufficient to
give a value to it; has both introduced an unintelligible language, and
has really involved the subject with so many extraneous circumstances,
that when we consider every thing, the perplexity is not much to be
wondered at.

I shall now endeavour to reduce all these perplexities under some
general heads.

[Sidenote: The terms metal, money, coin, bullion, and price, are all
           considered as synonimous.]

_1mo_, The first is, confounding ideas quite different in themselves.
The terms _gold_ and _silver_, _money of accompt_, _coin_, _bullion_,
and _price_, are often understood and made use of as synonimous,
although no things can be more different.

[Sidenote: What is meant by _metal_?]

The terms _gold_ and _silver_ should convey to us no other idea than
that of pure physical substances.

[Sidenote: What by _money_?]

That of _money of accompt_ represents an invariable scale for measuring
value.

[Sidenote: What by _coin_?]

_Coin_ conveys the idea of the public authority ascertaining the exact
proportion of fine and alloy in a mixed metal, and the realizing, in a
determinate weight of it, the invariable scale of money, sometimes
correctly, sometimes incorrectly.

[Sidenote: What by _bullion_?]

_Bullion_ carries the idea of certain determinate mixtures of the
metals, commonly ascertained by some public stamp or other, and drawing
their value exactly from the proportion of the fine metals they contain,
the workmanship being considered as of no value.

[Sidenote: What by _price_?]

_Price_, again, when considered as consisting in coin, is a more complex
idea still. In it are comprehended the value of the metals; the
authority of the stamp for the currency; the actual value of the coin as
a manufacture, above the value of it as a metal; the common and
universal equivalent of all things alienable; and the mean value of the
currency of which _price_ is supposed to contain exact aliquot parts,
when perhaps it does not.

The ideas, therefore, of _gold_ and _silver_, of _money_, of _coin_, of
_bullion_, and of _price_, are all different; they are commonly
confounded, both in speaking and in writing: from this arises the first
cause of perplexity.

[Sidenote: The abuse of the terms _rising_ and _sinking_, and inaccuracy
           of speech.]

_2do_, The second is owing to the common method of estimating the value,
and the proportions between _gold_ and _silver_; _coin_ and _bullion_;
_money_ and _merchandize_. The terms usually employed to express such
combinations are, _rising_ and _sinking_, or the like: people employ
these terms, without previously agreeing upon the thing which they are
to consider as fixed. The value of one of the precious metals is
constantly relative to that of the other; and yet, without attending to
this, we sometimes consider the gold, and sometimes the silver, as the
common measure; and while one is talking of gold as a common measure,
the person he talks to is considering it perhaps as the thing measured.
This inaccuracy, in supposing sometimes the one as fixed, and sometimes
the other, involves us in great obscurities; especially when we speak
upon such matters with those who have not distinct combinations of
ideas: and if three or four people are engaged in a conversation upon
money, every one using the same term in a different acceptation, the
confusion which it causes is inextricable.

In like manner, when we speak of coin and bullion, that of the two ought
to be considered as fixed which changes its proportion of value the
least with respect to all commodities.

[Sidenote: Prices attached to denominations of coin.]

Were prices attached to grains of silver and gold, bullion ought in that
case to be considered as fixed; but as they are more attached to the
denominations of the coin, coin ought to be considered as fixed.

[Sidenote: _Coinage raises the value of coin_, is a more proper
           expression than _Coinage sinks the price of commodities_.]

In the next place, in speaking of coin and commodities, we say, for
example, that the imposition of coinage makes the prices of commodities
sink. We do not, in this case, speak correctly; because if any thing
ought to be considered as fixed, it is the relative proportion of value
between the different sorts of commodities. In this case, therefore, I
think it would be more proper to say, that coinage raises the value of
coin, than that it sinks the value of commodities.

[Sidenote: How to avoid such ambiguities in speech.]

To prevent the ambiguity of such expressions from occasioning confusion,
and not to depart too far from common language, I have frequently spoken
of commodities as rising and sinking in their values with respect to
coin; but I have at the same time observed the influence which that
rising and sinking has upon the rising and sinking of the value of the
pound sterling realized in it.

[Sidenote: A case which cannot be resolved by this theory.]

I have not, however, concluded with equal certainty that the rising and
sinking in the value of bullion, _with respect to coin_, ought to imply
any change upon the value of the money-unit; because I have not been
able to determine whether prices ought to be considered as most attached
to the denominations of the coin, or to the grains of the metals: except
indeed in one case, to wit, when the quantity of the metals comes to be
augmented or diminished in the coin. In that case, I have not hesitated
to decide that, sooner or later, the influence of trade must operate a
rise or a fall in the current value of the specie, which will be marked
by an apparent rise or fall in the price of all commodities.

[Sidenote: In speaking, we do not distinguish between pure metal and
           that which is mixed with alloy.]

_3tio_, Our comparing the value of silver sometimes with the pure metal,
sometimes with that compounded with alloy, involves us frequently in a
language which is hardly to be understood.

Says one, a pound of silver, troy, is worth 67 shillings. He means a
pound of fine silver. We in England, says another, coin our pound troy
of silver into 62 shillings. He means the pound of standard silver,
which contains 18 penny weights of copper. Says a third, our pound of
silver, which we coin into 62 shillings, is not worth 57_s._ 6_d._ He
understands the shillings of fine silver of the same weight with those
of standard silver. Another affirms, that an ounce of standard silver,
which, at the mint, and in the coin, is worth no more than 5_s._ 2_d._
is worth in the market 5_s._ 6_d._ He means, that one must pay at that
rate for silver bullion, when they purchase it with over-rated gold. At
last comes Mr. Cantillon, who, as a proof of the decline of the English
commerce, affirms to us, in his Analysis of trade, p. 133. that both
silver and gold bullion are dearer in the London market than in the
coin: at the same time, he might have discovered the cause of it, from
the lightness of the gold and silver currency at the time he wrote;
since the phænomenon could proceed from nothing else: the new guineas
must then have been sent abroad. Says a Frenchman, one of our crowns of
3 livres, which passes for 60 sols, is intrinsically worth no more than
56½ sols. He means, that the fine silver it contains is worth no more
than 56½ sols, according to the mint price of the fine metals.

[Sidenote: Of the abuse of terms relative to the denomination of coins.]

_4to_, Another cause of perplexity in the money-jargon, is the
prodigious abuse of the terms which express the denominations of the
coin, or the numerary unit.

French historians write familiarly of sums of money in livres and
crowns, through all the stages of the monarchy. English writers (for the
most part) do the same, in speaking of pounds sterling. Nothing however
is more different than the ideas expressed by the same term.

[Sidenote: This illustrated by an example.]

Were any person, talking of lengths and distances, to use the word
_foot_, sometimes to signify _yard_, sometimes _perch_; or to use the
word _mile_, to signify sometimes _league_, sometimes _inch_, and
sometimes _fathom_; who could comprehend one word of his discourse
concerning the matter? Would we not even laugh at such a person, for
pretending to inform us of any thing concerning lengths or distances.

If any change be made upon the value of the money-unit of a country,
which is called a pound; in propriety of language, it can no more be
called a pound, after the change, than it can be called a rhinoceros.

[Sidenote: Farther obscurities from the abuse of language.]

_5to_, Another reason for the obscurity of money-jargon, is the manner
in which writers express themselves, when they speak of variations in
the value of money. Upon this occasion, says one, the King raised the
money 5 _per cent._ What does this mean? No man living can understand
the expression; because it may signify, that he raised either the
denomination of the coin, or the value of the unit. If he raised the
coin, he debased the unit: if he sunk the coin, he raised the unit. A
crown of 6 livres is a coin: a livre is the unit. If it is said, the 6
livre piece is raised; that is as much as to say, it is made to be more
than 6 units; consequently, as the silver in the piece does not change
its weight, it follows, that the unit, or money of accompt, is
diminished. On the other hand, if it is said that the livre is raised,
it implies that the crown, which contained 6 livres, is made to contain
less than 6 units; therefore, the value of the unit is raised; that is,
it is made to contain more silver than before.

[Sidenote: How to avoid such abuse.]

Writers, therefore, to be distinct, ought never to mention these
matters, without removing the ambiguity, in favour of readers of all
denominations. As for example: The King raised his coin, and debased his
money of accompt. For this reason the French expression is good, and
easily understood; _augmenter la valeur numeraire des especes_, is
liable to no obscurity.

There are also two terms used by French writers, which appear
synonimous, and yet are directly opposite; AFFOIBLISSEMENT, _et_
DIMINUTION _de la monnoïe_. Such terms are perplexing, and ought either
to be avoided, or constantly explained. The first signifies the coining
the specie of the same denomination lighter in the metals than before:
the last signifies the lowering the denominations of the coin already
made. The first therefore diminishes, the second increases the value of
the unit, which is the livre.

[Sidenote: Quest 2d. What is the difference between raising the _value_
           of coin, by imposing coinage, and raising the denomination of
           it?]

QUEST. II. What is the difference between the effects produced by
raising the value of the coin by the imposition of coinage, and raising
the denomination of it? This question is proposed as a further means of
rendering the money-jargon intelligible.

ANSW. The imposition of coinage, when it gives an advanced value to coin
above the metals it contains, is very different from that advanced value
which the coin appears to receive when the Sovereign arbitrarily raises
the denomination of it; or as the French call it, when he augments its
numerary value.

[Sidenote: Answer. The first is real, and affects foreign nations; the
           other does not.]

When the imposition of coinage gives an advanced value to the coin above
the bullion it contains, that value becomes real, and extends itself to
foreign nations; that is to say, the coin, so augmented as a
manufacture, must be bought with more foreign coin than formerly. But
when the denomination, or numerary value, is augmented, the same piece
(though augmented in denomination) is bought by strangers with the same
quantity of their coin as before. An example will make this plain.

[Sidenote: Proved by an example.]

Let us suppose the coin in France, in war time, reduced to the value of
bullion, and that the value of a crown of three livres, by the course of
exchange, should be then worth 29½ pence heavy silver sterling money; if
the balance of the French trade should become favourable in general, and
that coin should become 8 _per cent._ dearer than bullion in the Paris
market, then the price of the crown of three livres will rise 8 _per
cent._ upon the London exchange above 29½ pence heavy silver sterling
money, although there be respectively no balance to be paid in bullion
either by England or France. But let the King of France ordain, that the
crown of three livres shall be raised in its denomination to six livres,
and let the coin at that time be supposed to be at par with bullion in
the Paris market, the crown of three livres will then be paid as
formerly with 29½ pence. That is to say, the augmentation of the
denomination will have no effect upon the value of the coin in other
countries; whereas the augmentation affected by the operations of trade,
in consequence of the imposition of coinage, is a real augmentation,
since it extends to foreign nations.

[Sidenote: How the arbitrary method of raising the denomination of coin
           affects prices at home.]

Now it is certain and evident, that the augmentation of the numerary
value has the undoubted effect of sinking the value of the numerary unit
realized in the coin, and that upon such occasions we ought to say, that
the King has diminished the value of the livre, and not that he has
raised the value of the coin. But the abuse of language has made people
consider the livre as the thing fixed, and therefore the coin is
considered as the thing which rises and sinks. The consequence of this
is, to introduce another abuse of language. People say, that the prices
of commodities rise: I ask, With respect to what? Not with respect to
the pieces of coin, but with respect to the denominations they carry:
that is to say, with respect to livres; although the livre be considered
as the thing fixed. There is, however, a reason why people express
themselves in this improper manner, which proceeds from the perplexity
and confusion of their ideas concerning money.

When the King of France arbitrarily changes the numerary value of his
coin, commodities are found, by universal experience, to stick so
closely to the denominations of it, that people are apt to think that it
is the King’s will and pleasure, and not the metal of which the coin is
made, which gives it a value. But commodities depart from these
denominations by degrees, and fix themselves a-new at a determinate
value of the fine metals, proportioned to what they bear in foreign
nations. This is brought about by the operations of commerce; and
consequently, the rise of prices not taking place till some time after
the numerary value of the coin has been augmented, people accustom
themselves to say, that the augmenting the denomination of the coin
raises prices, and that diminishing the denomination sinks them. But did
all prices strictly adhere to the grains of bullion contained in the
coin, and not to the denominations of the numerary value, then language
would change, and no body would speak about the rising and sinking of
prices, but of the rising and sinking of livres, sols, and deniers.

I hope, from what has been said, that the difference between raising the
value of the coin by imposing coinage, and the raising the nominal value
of it by augmenting the denomination or numerary value of it, is
perfectly understood. The first raises the value of the numerary unit,
by giving a real additional value to the coin as a manufacture: the last
raises, for a while, the value of the numerary unit; only because the
price of commodities, being attached to the denominations of money of
accompt, stick to them, until the operations of trade reduce them to
their true principle.

Whenever, therefore, the terms _rising_ and _sinking_ are applied to
value, the thing which is said to rise, is supposed to be the moveable;
and the thing it is compared with, or with respect to which it is said
to rise or sink, is supposed to be the term fixed. Every one, therefore,
who reads books upon this subject, ought, upon all occasions where there
is mention made of rising and sinking of the price of the gold, silver,
bullion, coin, exchange, or commodities, constantly to cast his eye upon
the thing which is supposed to be fixed, and retaining that in his mind,
he will preserve his ideas distinct.

[Sidenote: Quest. 2. How will the imposition of coinage affect the
           creditors of Great Britain?]

QUEST. III. Let us suppose that the imposition of coinage, when properly
laid on, will not raise the value of the pound sterling; and
consequently that it will not affect the domestic interests of Great
Britain: it may be asked, What influence that imposition will have upon
the interest of her foreign creditors, since it must affect exchange?

[Sidenote: Answ. If they continue to be paid by denominations, they will
           gain; if by weight of metal, they will not gain, nor will
           they lose.]

ANSW. The foreign creditors of the nation will thereby be gainers,
provided their interest continues to be paid in denominations of pounds
sterling, and not in a determinate number of grains of the fine metals,
as was proposed to be done in the fourteenth chapter of the first part.
The reason is plain: upon all occasions, when coin carries an advanced
price above bullion, those who have funds in England will gain upon
exchange. This gain will nowise, I think, be at the expence of the
nation, but at the expence of those foreigners who have occasion for
paper draughts upon London.

[Sidenote: Proved by an example.]

A creditor of England (in Holland I shall suppose) draws for a thousand
pounds sterling, (the interest of his English funds) a Dutchman who owes
a thousand pounds sterling in London, buys his bill; must he not pay the
creditor of England, not only the intrinsic value of the bullion
contained in the thousand pounds sterling, but also the difference
between the thousand pounds sterling in coin, and the bullion it
contains, according to the price of it in the London market? This
difference then, received by the proprietor of the English funds, is
clear gain to him, and is no loss to the nation; it is a loss to the
Dutchman.

Farther, every Dutchman who pays his debts to people residing in
England, must suffer the same loss; that is, he must pay the coinage,
which at present the state makes him a present of.

From this I think it is plain, that while the balance of trade is
favourable to England, or at par, all remittances made by foreigners, to
pay their English debts, must pay the coinage.

The operation of this principle has not a little contributed to
facilitate the establishment of the French credit.

[Sidenote: How the imposition of coinage advances the credit of France.]

When France borrows, especially in war time, foreigners can remit to
Paris the money they lend nearly at par with bullion. Then they pay
little or no coinage; and when peace is restored, the coin rising in its
value, they gain annually several _per cent._ upon their draughts for
their interest, to wit, all the advanced value of the coin, at no loss
to France.

[Sidenote: Quest. 4. Is the plan we have proposed effectual towards
           preserving the pound sterling invariable?]

QUEST. IV. Is the preserving the pound sterling at the mean value of a
determinate weight of fine gold, and fine silver, a sure method of
realizing the unit of money of accompt, so as to preserve it at all
times invariable?

[Sidenote: Answ. No; but seems to be the best relative to material
           money.]

ANSW. I apprehend it is not; although it seems to be the best that can
be devised, upon supposition that the metals are to be made use of, as
the most proper substance for realizing the scale.

I have said, in the beginning of this book, that the use of the scale
was to measure the relative value of things alienable. Now the metals
themselves being of the number of things alienable, and their proportion
of value being nowise determined, but liable to augmentations and
diminutions, as well as that of grain or any other commodity, no scale
which is attached to them can measure any thing but their weight and
fineness, and consequently can be no permanent measure for any thing
else.

[Sidenote: A scale of value realized in metal can never be exact;
           because the metal itself varies in its value.]

Did the value of commodities rise and fall with respect to grains of the
fine metals, in the same proportion that they rise and fall with regard
to one another, the scale would be exact: but if the grains of metal can
acquire an increment, and a diminution of value, from circumstances
entirely peculiar to themselves, such circumstances must render the
scale they compose inaccurate in proportion.

[Sidenote: 1. From the manufacturing of it.]

[Sidenote: 2. From the interest of money.]

[Sidenote: 3. From the manners of a people.]

Now we have seen how the imposition of coinage enhances the value of
coin. The rising and sinking of the interest of money has the same
effect. The vicissitudes to which credit is liable has a prodigious
influence upon the value of the metals. The manners even of a people,
which can be determined by no principle, operate the same effect. When
people, for example, are given to hoarding, the metals come to be
demanded with more eagerness, that is, the competition to acquire them
is greater; consequently the value of them with respect to all
commodities, is greater than when they are purely considered as money of
accompt.

[Sidenote: The only exact scale of value is that which can measure the
           metals like every other commodity.]

That scale, therefore, is the only just one, which measuring the value
of the metals, like that of every thing else, renders every individual
of a state equally rich, who is proprietor of the same number of
denominations of specie; whether his wealth be in gold, silver, or any
other property or commodity.

[Sidenote: Explanation of this proportion]

Now I agree that, at any given time, this is the case when the scale is
properly attached to the metals; but it is not permanently so. A
determinate property in land bears sometimes a greater, sometimes a less
proportion to a determinate property in money. When the scale is
attached to the metals, he who is proprietor, for instance, of a
thousand denominations in coin, becomes richer or poorer, according to
the fluctuation of the value of that commodity, the metals. Whereas when
the scale is not attached to any species of commodity, nothing can
change his proportion of wealth, except the augmentation or diminution
of the value of the whole state. This idea is not so distinct as I could
wish: let me illustrate it by an example.

[Sidenote: by an example,]

Suppose then three partners (A), (B), (C). They form a common stock by
equal shares; (A) contributes a thousand pounds sterling in current
specie, (B) the same value in corn, (C) a like value in broad cloth. Let
me suppose the measures of these commodities to be expressed by their
proper denominations; the metals by grains, the corn by bushels, the
broad cloth by yards. I suppose that at the end of the year 20 _per
cent._ is gained upon each article of stock; that is, 20 _per cent._
increase upon the grains of metal, 20 _per cent._ on the bushels of
grain, 20 _per cent._ on the yards of broad cloth. This supposition may
be allowed. I ask, if it would not be a much more equal way of dividing
this profit, to reduce the whole value of the grains, bushels, and
yards, to the then actual value in pounds sterling, and so to divide;
than if every man were to take his 20 _per cent._ out of that commodity
he had furnished to the co-partnership? This method of reducing all to a
common measure, is what I understand by an ideal scale of money of
accompt.

[Sidenote: and by an application to the bank of Amsterdam.]

The bank of Amsterdam pays none in either gold or silver coin, or
bullion; consequently it cannot be said, that the florin banco is
attached to the metals. What is it then which determines its value? I
answer, That which it can bring; and what it can bring when turned into
gold or silver, shews the proportion of the metals to every other
commodity whatsoever _at that time_: such and such only is the nature of
an invariable scale.

[Sidenote: How the locking up the coin in that bank renders the value of
           it more stable.]

I confess I am not capable of analyzing all the complicated operations
of trade in such a distinct manner as to demonstrate how the universal
circulation of value, over the commercial world, should operate this
effect; and how the burying, as it were, a quantity of gold and silver
in a vault, should give a more invariable worth to a florin, whose value
depends upon it, than if the metal itself was to circulate in coin.

Thus far, however, I think I understand, that the impossibility of
profiting of the _rising_ value of one of the metals (which is buried)
ought to find a compensation at all times in avoiding the loss upon the
other, which sinks in its value.

Farther, the burying the coin both in gold and silver is in a manner
forming these two metals into one mass; this takes away the variation in
the proportion of their value, which principally disturbs the uniformity
of their operation as a scale. They cannot either be considered as
commodities, because they are taken out of commerce entirely; yet the
permanent value of them remains. Upon that the bank money is secured;
but it is not realized in it. In banks which pay in coin the case is
different; because the denominations in their paper are liable to all
the fluctuations incident to the coin in which they pay. The bank money,
therefore, of Amsterdam is pure money of accompt, and has nothing of
merchandize in it from the metals in the vaults. The paper of all banks
which pay, rises and falls in value, according to the currencies in
which their notes are acquitted.

I leave the farther delucidation of this mysterious affair to people of
better capacity, and of more extensive knowledge in those matters than I
can pretend to.

To conclude, no material money, let it be contrived as it will, is
exempted from vicissitudes in its value as a metal. This is proved by
the universal risings and sinkings in the price of commodities, in
consequence of circumstances peculiar to the coin. These risings and
sinkings of prices, I say, are properly risings and sinkings of the
value of the coin, and that again is a lengthening and contracting of
the equal parts of the scale of value which is attached to it. Now there
is no such thing as any vicissitudes in the prices _of all commodities_
with respect to bank money, although nothing is more common than
fluctuations in agio, with respect to current money; consequently, bank
money has a property and a stability in it, which no material money is
capable of acquiring, and for that reason it is preferable to it, and is
properly considered as the thing fixed.

[Sidenote: QUEST. 5. Will not the imposition of coinage in England
           frequently stop the mint?]

QUEST. V. Will not the imposition of coinage in England prevent, upon
many occasions, the carrying bullion to be coined at the mint, when it
would be carried were the coinage free?

[Sidenote: ANSW. Certainly; when the balance of trade is unfavourable.]

ANSW. Without all doubt. When coinage is free, every man who imports
bullion runs with it to the mint; there it is proved, cut, and stamped
to his hand, and at no cost. Now to what purpose all this expence; why
carry bullion to be coined, while the balance of trade is against a
nation, since such bullion must be re-exported, together with a part of
the national stock of the metals? Besides, the coining of it gratis,
adds not the smallest value to the metals considered as a manufacture;
consequently, upon the exportation, the whole price of coinage is
entirely lost, and the national stock of coin is not thereby augmented;
nor would it be augmented while trade is unfavourable, were five hundred
mints kept constantly at work.

[Sidenote: But this is an advantage to England which France now enjoys.]

The imposition of coinage, therefore, has these good effects. First, it
prevents bullion from being coined, except when such coined bullion can
remain in the country and augment the national stock of coin. Secondly,
as has been said, it gives an additional value to the coin, even in
foreign countries, and thereby prevents it from being melted down
abroad, in order to be re-coined in other mints, and thus augment the
stock of coin in rival nations.

I believe no body ever imports louis d’ors to be coined in the English
mint (notwithstanding of the benefit there is in importing gold into
England from France, where the proportion of the metals is lower) yet
nothing is more common than to carry guineas to every foreign mint, at
the bare price of bullion. This is the reason why so little English
coin, and so much French coin is found in circulation, in countries
foreign to both these nations.

[Sidenote: The coin of France passes in other nations above its value as
           a metal, and returns to France unmelted.]

Louis d’ors, in consequence of the high imposition of coinage in the
French mint, pass current, almost every where, for more than their
intrinsic value, even when compared with the coin of the very nation
where they circulate without the sanction of public authority; and when
that authority regulates their currency, according to their intrinsic
value, such regulation has the same effect as forbidding them
altogether; because the moment a money-jobber lays his hand upon them at
the statute value, he circulates them no more; but sends them either
back to France, or to some country where they pass, by a conventional
value, above their intrinsic worth. Thus louis d’ors, as well as all
French coin, are effectually prevented from being melted down, and so
soon as the balance of the French trade becomes favourable, they return
home.

[Sidenote: QUEST. 6. Is not this return a loss to France?]

QUEST. VI. Is not this return of louis d’ors to France, upon the balance
of their trade becoming favourable, a loss to France; since, in that
case, the balance of their trade is paid with a less weight of bullion
than it would be paid with, were their coin worth no more than bullion;
and secondly, because when the coin is exported to pay the balance, it
is exported upon the footing of bullion, and when it returns it is paid
back at an advanced price?

[Sidenote: Intricacy of this question.]

The difficulty of resolving this question proceeds from the complication
of circumstances in which it is involved; and the intention of proposing
it, is to shew how necessary it is, in practice, to combine every
circumstance in political problems.

[Sidenote: Resolution of it.]

I shall therefore observe, that since, at all times almost, French coin
passes (out of France) for more than its intrinsic value, it is not well
possible to suppose that, even during a wrong balance of the French
trade, their coin can ever fall so low as the price of bullion;
consequently the French by exporting their coin, upon such occasions,
above the value of bullion, that nation is a gainer of all the
difference. This operates a compensation of the loss (if any they
sustain) upon the return of their coin. In the second place, when the
balance becomes favourable for France, and when there is found a profit
in sending back the French coin, the demand that is made for it, by
those who want to pick it up in foreign countries, raises the value of
it there in circulation; this again favours the trade of France, and
makes the difference of paying what one owes to France in bullion at the
market price, or in louis d’ors at the advanced value, very
inconsiderable; which consequently prevents merchants from finding any
great advantage in sending back large quantities of it.

Besides, when the coin returns, although it has an advanced value, it
has no advanced denomination. It was exported according to its numerary
value, and it returns upon the same footing. Farther, when the coin
returns as the price of French merchandize, for the same value it bears
in the country, I cannot discover a principle which can make this appear
to be a loss to France. The loss therefore must be upon the exportation
of the coin, not upon the return of it. But we have said that if it be
exported at a higher value than that of the bullion it contains, this
must imply a profit to France. Consequently, the remainder of loss upon
exportation must be apparent, not real: It is a loss to Frenchmen, who,
in exporting the coin below the full value of it (coinage included) lose
a part of what they had paid the King for the coinage; that is to say,
they lose it so far as they do not draw it back _in full_ from the
foreigners to whom they owe; [Sidenote: It is no loss to France.] but it
is no loss to France: on the contrary, it is a gain, as far as any part
of the coinage is drawn back; and this is the case as oft as the coin is
exported above the price of bullion.

[Sidenote: Another view of this question.]

Or in another view. This going out and returning of the French coin, may
be considered as a loss to France in this respect, that when the balance
of her trade is against her, when her coin loses of its advanced value
in payments made to strangers for the price of foreign commodities,
those who consume such commodities in France, must consume them at an
advanced price to themselves, but at no additional profit to foreign
suppliers; because as to these last, the French coin, with which we
suppose the commodities to be paid, having lost of its value every
where, cannot then purchase so much as at another time, and consequently
is not worth so much to the foreign supplier who receives it. For the
better understanding of what has been here said, attention is to be had
to the difference there is between a _national_ loss, and the loss
sustained by the individuals in a nation. The balance of trade is the
national profit, or the national loss; but the gains or losses of
individuals, may be compatible with either a right or a wrong balance of
the trade of the nation to which they belong. This will be fully
explained when we come to treat of exchange.

In this respect, therefore, France may be supposed to lose upon
exporting her coin, to wit, so far as she consumes foreign commodities
at an advanced value; but then I say, that in this case France loses the
whole price of the commodities, not the advanced price only; because she
loses the balance of her trade. Abstracted from that, I say she loses
nothing. Who loses then the advanced price? I answer, the consumer of
the commodity loses it, and I say that no body gains it. This is what,
in the eighth chapter of the second book, was called positive loss, and
it is owing to the annihilation of a part of the advanced value of the
coin, which the operations of commerce have effectuated.

In these respects only can France be considered as a loser upon
exporting her coin; but in having it returned upon her, when at an
advanced price above bullion, the loss is nothing; because the advanced
price then is a real value added to the coin, and there is no manner of
difference as to France, to receive, for the balance of her trade, an
hundred pounds weight of her own louis d’ors, or an hundred and eight
pounds of standard gold bullion, at such times as bullion is commonly
carried to the mint; because the one and the other weight of coin and
bullion will answer the same occasions both in the Paris market, and in
most trading towns in Europe.

From these principles we may gather how effectually the imposition of
coinage must prevent the melting down of the coin, providing a
sufficient attention is had to preserve the denominations of the coin in
both species at the exact proportion of the market price of the metals.

[Sidenote: QUEST. 7. If by over-rating gold, the English lose their
           silver, Why should not France, by over-rating silver, lose
           their gold?]

QUEST. VII. The two metals being only valued by one another, if the
English, by valuing the gold higher than the French do, occasion the
exportation of their silver, why should not the French, by valuing their
silver higher than the English do, occasion thereby the exportation of
their gold? And if the English, by over-rating their gold, prevent the
carrying silver to be coined at their mint, why should not the French by
over-rating their silver prevent the carrying gold to be coined in their
mint?

[Sidenote: ANSW. Because the English rate their gold above the value of
           it in _their own market_, the French do not so with their
           silver.]

ANSW. The English over-rate their gold not only with respect to other
nations, but with respect to the value of it in their own market;
whereas the French preserve, in their gold and silver coins, nearly the
proportion between the metals as they are sold in their own market.

In France no body can profit by melting down either of the species, in
order to sell it, with advantage, as bullion; but in England, by melting
the heavy silver coin, one may sell it in London for more gold than the
same coin not melted can purchase.

But here it is objected, that although the proportion between gold and
silver, in the English coin, were set upon a par with that of the metals
in the London market, still one species may be exported with profit,
providing the proportion be different in other nations.

There is little force in this objection, and were there any, it would be
an additional argument for the imposition of coinage; because by this
the exportation of either of the species, for the sake of any small
difference which may sometimes be found between the proportion of the
metals in the different markets of Europe, would be prevented. This
circumstance however requires a more particular examination.

It is a principle in commerce, that the demand for any commodity raises
the value of it; and every nation knows how to profit of a demand for
what they have.

[Sidenote: How the proportion of the metals is kept nearly the same in
           all European markets.]

Whenever, therefore, one of the metals bears an under value in one
nation, below what it bears in another, that under value makes that
species more demanded by strangers, and it consequently rises in its
value, even at home.

[Sidenote: Because when home demand disturbs the proportion, foreign
           trade brings it even again.]

By this principle the proportion between the metals in European markets
is kept nearly the same, and the small difference which is found does
not so much proceed from the demand of foreign trade, as from the taste
of the inhabitants. The foreign demand tends to set the proportion even
in all markets, and the internal demand for one metal preferably to
another, is what makes it vary.

The carrying the metals backwards and forwards is attended with risque
and expence; there is not, therefore, so much danger of a nation’s being
stripped of one of its species of current coin by such a trade, as there
is when the proportion of the market price of the metals is different,
at home, from that observed in the coin; because in the last case, every
one may profit of the disproportion, at the trifling expence of melting
down the rising species.

[Sidenote: Coin of gold and silver should be proportioned to the rate of
           the market at home,]

From this we may conclude, that nations ought to regulate the proportion
of the metals in their coin, according to the market price of them at
home, without regard to what it is found to be in other nations; because
they may be assured, that the moment any difference in the market price
shall begin to be profited of, that very demand will alter the
proportion, and raise the market price of the metal sought for by
foreigners. While the coin, therefore, is kept at the proportion of the
market at home, and while the denominations of both species are made to
keep pace with it, it will be utterly impossible for any nation to hurt
another by any such traffic in the metals.

[Sidenote: and nations cannot fix that proportion by any convention
           among themselves.]

We may farther conclude, that it is to no purpose for nations to agree
by treaty upon a certain proportion between silver and gold in their
coins: it is the several market prices every where which alone can
regulate that proportion, and the only method to keep matters even
between them, is to make the denominations in both species keep an equal
pace with the price of the metals in their own market.

[Sidenote: Why is the proportion of the metals so different in England
           and Asia?]

Here it is farther objected, that were these principles just, there
would not be found so great a disproportion as there actually is,
between the value of gold and silver in Europe, and in the empire of
China.

To this I answer, that the principles are just, and that this difference
proceeds from incidental circumstances which I shall now point out.

[Sidenote: Answer to this.]

First then, the European trade hardly penetrates into that vast empire.
2. The lowness of the proportion between gold and silver is maintained
by the high internal demand for silver in China. 3. The India trade
being every where in the hands of companies, there is not so great a
competition between the sellers of silver, in the Chinese market, as if
that trade were open to every private adventurer; consequently the price
of it is not so liable to be diminished. And last of all, the expence of
carrying silver thither, and the long lying out of the interest, would
put a stop to the trade, were the proportion between the metals to rise
in China. This prevents competition still more between the different
European companies, and consequently prevents the rising of the
proportion.

I need not observe, I suppose, that the term _rising of the proportion_,
denotes the rising of the price of silver; as when being at that of 1 to
10, it comes, for example, to that of 1 to 11. This term has been
already explained.

[Sidenote: QUEST. 8. Is it the interest of Princes to debase the
           standard of their coin?]

QUEST. VIII. Is it the interest of Princes to debase the standard of
their coin?

ANSW. This question has been already touched upon in the twelfth chapter
of the first part. Perhaps some farther observations upon it may not be
found superfluous.

In order to set it in a fair light, I shall begin by reducing it to its
ruling principle.

The question turning entirely upon the _interest_ of Princes, I shall
take no notice of the iniquity of such a measure with respect to their
subjects; but shall confine it purely to the _interest_ they may have in
exercising this branch of prerogative.

[Sidenote: ANSW. It is their immediate interest to debase it when they
           are debtors, and to raise it when creditors, but always
           unjust.]

I answer then, as I have hinted above, that it is their _interest_ to
debase the standard of their coin when they are in the situation of
debtors; and it is their _interest_ to raise the standard when they are
in the situation of creditors.

Debasing the standard I have explained to be the diminution of the
intrinsic value of the unit below what it was before, either by raising
the denomination, augmenting the alloy, or diminishing the weight of the
coin.

Now since Princes pay their servants by denominations, that is, by money
of accompt, the more they augment the denomination of the coin they
possess, the more they gain upon what they have at the time. But they
lose proportionally upon their revenue ever after; because the rents and
duties levied on their subjects being also paid by denominations, the
Prince loses every year on his income what he had gained upon one
operation.

From this we may draw a principle, that Kings who have begun to debase
the standard, ought to go regularly on every year, as long as they find
themselves in the state of debtors; and when they come to alter their
situation, and become of the class of creditors, it is then their
interest to raise the standard. This must be a little further explained.

[Sidenote: Who are debtors and who creditors, and how Princes who
           incline to rob their subjects may avoid robbing themselves at
           the same time.]

It has been abundantly proved, that increasing the denomination, or
debasing the standard, must constantly be advantageous to the whole
class of debtors; consequently, Princes, who are upon certain occasions
obliged to lay out more than they receive, may then be considered as
being of that class. Whoever receives from another what the other is
obliged to pay him, may be considered as a creditor; whoever gives to
another what the other is intitled to demand of him, may be considered
as a debtor. Those, therefore, who both pay and receive, are, upon the
whole, either debtor or creditor, according to the side which
preponderates. He who is obliged annually to pay more than he annually
receives, must be obliged either to run in debt, to borrow, or to take
from a fund already formed (a treasure). The maxim therefore is, first
to fill the exchequer with the annual income; then to debase the
standard; and last of all to pay. The debts paid, and the current
expence brought within the income; then is the time to raise the
standard. This operation is like that of the ram; he runs back in order
to advance again with more force.

[Sidenote: Example of a Prince who is now employing this engine against
           his enemies, not his subjects.]

The great master of government and political oeconomy well understands
this doctrine. He is now spending his treasure, not his income. He is
then in the state of the debtors, and accordingly is regularly every
year debasing the standard of the S——n coin. This debasement, I suppose,
regularly takes place after the contributions for the year are paid. So
soon as the war is over, and that this oeconomical Prince shall return
to the state of creditor, he will, I suppose, suppress the currency of
all this bad money, and restore the standard. That is to say, he has
during the war been ruining all the class of creditors in permanent
contracts (the S——n nobility) and when the peace is re-established their
own Prince may indemnify them, if he pleases, by restoring the former
value of the unit. All sudden revolutions are hurtful; but necessity has
no law[3].

Footnote 3:

  Writ in the year 1760.

This, in a few words, is, I think, the answer to the question proposed.
Princes have for several centuries, in almost every nation in Europe,
been gradually debasing the standard of their money-unit; and the debts
they have contracted during the debasement have constantly been an
argument against the restoring it. But had they first regulated all
their debts upon the footing of the last debasement, stipulating with
their creditors that they were to be paid upon the footing of the then
currency, that is to say, according to the French stile, _au cours du
jour_ of the stipulation; they then might, without any advantage to
their creditors, and with great profit to themselves, have restored the
standard, and so prepared the means of executing the same operation as
before, upon a new emergency.

[Sidenote: Writers against this practice have used wrong arguments to
           dissuade Princes from it.]

Those who have writ against this practice of debasing the standard, have
made use of wrong arguments to dissuade Princes from following such a
measure. They have first represented it as hurtful to their own
interest. This we have seen is not always true. They have also
endeavoured to prove that it is vastly prejudicial to commerce. This is
the great point laboured by Dutot, in his _Reflexions Politiques sur le
Commerce_; but to very little purpose. All the facts and arguments he
has produced to prove (by the source of exchange) that the variations
made in France in the standard value of their crown of three livres did
hurt to the trade of that nation, prove nothing at all, as it would be
easy to shew, were this a proper place. The hurt done to manufactures is
greater; but, in a trading nation, those establishments being under the
influence and direction of merchants, who are perfectly instructed as to
every consequence of such alterations, the manufacturers, after a very
short time, raise their prices to the full proportion of the increase in
the denomination of the coin.

[Sidenote: The proper arguments against it are three.]

The real inconveniencies which proceed from this exercise of power, may
be reduced to three.

[Sidenote: 1. It disturbs the ideas of a people with regard to value.]

1_mo_, It disturbs the ideas of a whole nation with regard to value, and
gives an advantage in all bargains, to those of the society who can
calculate, over those who cannot.

[Sidenote: 2. It either robs the class of debtors or of creditors.]

2_do_, It robs the whole class of debtors when the standard is raised;
and it robs the whole class of creditors when it is debased.

[Sidenote: 3. It ruins credit.]

3_tio_, It ruins credit; because no man will borrow or lend, in a
country where he cannot be sure of receiving back the value of his loan;
or of being in a capacity of clearing himself by paying back the value
he had borrowed.

[Sidenote: This last circumstance will probably put an end to the
           practice.]

This last circumstance has overturned the whole scheme in France.
Princes would go on debasing their standard as formerly, could they do
it and preserve their credit. But who will lend a shilling to a Prince
if he suspects he will pay him back, perhaps, with sixpence? The Prince
above mentioned does not borrow; and as he is the only one in this
situation, he may debase his standard: but others cannot venture upon
such a step.

[Sidenote: Quest. 9. What is the best form to be given to coin?]

QUEST. IX. What is the best form to be given to coin?

[Sidenote: Difference between medals and coins.]

ANSW. The intention of coinage, _for circulation_, being to ascertain
the quantity of the fine metals in every piece, and not to represent the
effigies of the sovereign, we see a manifest difference every where
between the impressions struck upon medals, and those of the current
coin: in the first, the head is raised, in the last, it is purposely
made flat.

[Sidenote: Of indenting the impression.]

Antiently, the impression put upon some of the English coins was a
cross; which being indented upon the penny, instead of being raised,
occasioned these pieces frequently to be broken into four parts. This is
said to have given rise to the denomination of farthings, or fourth
parts. The indenting the impression upon the coin, is no doubt a
preservative against its wearing; but as it is liable to other
inconveniences, and is so repugnant to custom, it would be ridiculous,
perhaps, to propose it.

I shall reduce, therefore, all I have to propose as a supplement to what
has been said already on this subject, to a very few observations.

[Sidenote: The less the surface, the wearing is the less.]

1_mo_, The less surface any piece has in proportion to its mass, the
less it is worn in circulation; and as all coin is made cylindrical,
that whose form approaches nearest to the cylinder, whose height is
equal to its diameter, must have the least. Coin therefore ought to be
made thick, and for this reason louis d’ors are of a better form than
guineas, and guineas of a far better form than ducats. Were it easy to
give the surface a spheroidal form on both sides, rendring the coin
thicker in the middle than at the edges, the surface would be thereby a
little more diminished.

[Sidenote: The advantage of heavy pieces for the greater part of the
           coin; yet small denominations are useful, in some cases, for
           preventing the rise of prices.]

2_do_, The great credit of paper in England, is a vast advantage in many
respects. It renders coin less necessary. While that credit subsists,
large payments will always be made in paper; and this renders the
coinage of gold in large heavy pieces less necessary. The coin,
therefore, in England, ought to be calculated for the easy changing of
bank notes, not with a view to the making great payments in it. For this
purpose, two and three pound pieces might be full as convenient as
single guineas, and half guineas might be proscribed. Small
denominations of gold coin lead to expence, and tend to raise the prices
of such commodities as people of fashion pay immediately out of their
own pockets. As for the silver, the same principles are to be observed.
Crown pieces are very convenient in payments, and have a great advantage
over shillings and sixpences in point of surface. The practice in France
of coining the greatest part of their silver in such pieces abundantly
shews how few of the lesser denominations (that is shillings, &c.) are
necessary for carrying on circulation.

[Sidenote: Mixt metal better than copper for small denominations, as
           appears from the practice in Germany.]

3_tio_, The copper coin of England is exceedingly bulky, in order to
give it an intrinsic value. This makes many people ashamed to carry it;
consequently increases expence, and raises the price of many things for
the reason already given.

What inconveniency could there possibly be in making pence of a mixed
metal of a much lower standard than the other coin. The coin would be
less bulky, and the intrinsic value might be preserved. This is the
custom all over Germany. The lower denominations of the coin are all of
different fineness. The standard for what they call the _gros_; the 7,
the 10, the 17, the 20 creutzer pieces, are all of different fineness;
but still in the same sum, in whatever coin it is paid, according to the
laws, there ought to be found the same quantity of fine silver. This
enables them to coin pieces of very small denominations which have
however the same intrinsic value with the other denominations of the
coin, and which are neither of an unwieldy bulk, or of an inconvenient
smallness. This is the regulation in Germany: I do not say that the
regulation is well observed.

Farthings of copper are good and convenient; a few of these ought always
to be preserved in favour of the lower classes of the people, who
thereby are enabled to keep down the prices of the small necessaries of
life: a matter of the greatest importance to a trading nation.

Nations ought to copy from one another what is good and convenient, and
should be above the thraldom of little prejudices in favour of
established customs, which have frequently nothing but custom to
recommend them.

[Sidenote: Mixed metal never to be bagged up with fine.]

4_to_, It must be observed that upon adopting the German regulation as
to pence, such coin must not be allowed to be put up in bags of coin
delivered by weight; nor made a legal tender beyond the value of the
lowest silver coin.


------------------------------------------------------------------------


                               CHAP. VII.
 _Of the Regulations observed in France, with regard to Coin, Bullion,
                              and Plate._


It now only remains, that I lay before the reader what I have been able
to gather, upon good authority, concerning the regulations in some of
the principal nations of Europe, with regard to their mint: and this so
far only as is necessary for illustrating our subject, and confirming
the principles we have been laying down.

[Sidenote: The marc is the unit of French weight at the mint.]

The unit of weight in the French mint, is the _Marc_; composed of eight
ounces, every ounce containing 576 grains. The marc consequently
contains 4608 grains of Paris weight, called _poids de marc_.

[Sidenote: The remedy of weight upon silver what.]

By this weight the bullion is delivered to, and the coin is taken from
the workmen in the mint, to whom the King gives an allowance of 36
grains upon the weight of every marc of coin delivered. This allowance
is called _le remede de poids_.

A marc therefore of French silver coin, is not to be reckoned at 4608
grains, but at 4572 grains effective.

[Sidenote: The standard of fineness is 11 fine to 1 alloy.]

The _Titre_ or title, as the French call it, or the standard of their
silver coin, is 11 parts fine to 1 part alloy. At this rate we shall
find in this _Marc_ of coin, consisting of 4572 grains standard silver,
4191 grains of fine silver, and 381 grains of alloy.

[Sidenote: Remedy of alloy what.]

But the workmen have also an allowance of 3 grains upon the fineness,
which introduces a new equation.

The mass of silver in the French mint (when we speak of the fineness) is
supposed to be divided into 12 deniers, and every denier into 24 grains;
which, in this acceptation, are both denominations of proportion, not of
weight.

Any mass of silver, therefore, of whatever weight, must be supposed to
contain 12 × 24 = 288 grains of proportion; consequently, were the
standard exactly 11 deniers fine, the proportion would be marked thus,
264 grains fine, to 24 alloy; but since there is an allowance of 3
grains of proportion, called _le remede d’alloy_, this brings the
proportion to be as 261 is to 27. This is the exact standard of French
silver coin, and answers to 10 deniers and 21 grains fine, which is the
term used in the mint.

To find, therefore, the number of grains of fine silver in a marc of the
French silver coin, we must state this proportion, 288 : 261 :: 4572 :
4143.38.

[Sidenote: Quantity of fine silver in a marc, as delivered at the mint.]

The marc, therefore, of coined silver, after all deductions for alloy,
and for _remede de poids_, contains of fine silver 4143.38 grains _poids
de marc_.

[Sidenote: Into what coined.]

This _marc_ is coined into 8 great crowns and 3⁄10 of a crown, value in
the coin 49 livres, 16 sols.

If therefore 4143.38 grains of fine silver, be worth 49 livres 16 sols,
4608 grains (or a marc of fine silver) will be worth 55 livres 6 sols 9
deniers.

[Sidenote: Mint price of a marc of fine silver.]

But the mint price of fine silver is 51 livres 3 sols 3 deniers.

The difference, therefore, between the mint price of fine silver, and
the price of it in the coin, will shew exactly the expence of coinage;
consequently there is withheld for the expence of coinage and duty of
seignorage (all which deductions and impositions are called _le trait
des monnoyes_) 4 livres 3 sols 6 deniers upon every marc of fine silver.
To know how much this makes _per cent._ state it thus,

                     51.162 : 55.38 :: 100 : 108.2.

[Sidenote: The price of coinage 8⅕ per cent. upon silver.]

So that in France there is 8.2 _per cent._ deducted upon the coinage of
silver, as has been said. Let us next examine the regulations as to the
gold.

[Sidenote: Remedy of weight upon gold.]

The marc, as above, is the unit of weight for the gold, and contains, as
has been said, 4608 grains, of which 15 grains are allowed to the
workmen for the _Remede de poids_: remains of standard gold in the marc
4593 grains.

[Sidenote: The fineness of standard gold.]

The fineness is reckoned by carats (not a weight, but a denomination of
proportion) for the gold, as the denier is for the silver. Fine gold is
said to be, as in England, of 24 carats. The carat is divided into 32
parts, so 32 × 24 = 768, are the parts into which any given mass of gold
is supposed to be divided, when we speak of the standard fineness.

[Sidenote: The remedy of alloy upon gold.]

The standard of French gold is the same with that of silver, to wit,
11⁄12, or 22 carats fine. Upon this the workmen are allowed 12⁄32 parts
of a carat, for the _Remede d’alloy_; which reduces the standard to
210⁄32 carats fine, to 12⁄32 carats alloy. This expressed according to
the division above mentioned, stands thus, 692 parts fine to 76 alloy.

To find, therefore, the number of grains of fine gold in a marc of the
coin, we must state the following analogy.

                      768 : 692 :: 4593 : 4138.48.

[Sidenote: The marc into what coined.]

The marc of gold coin therefore contains, after all deductions, 4138.48
grains of fine gold.

This marc is coined into 30 louis d’ors of 24 livres each, value in all
720 livres.

If therefore 4138.48 grains of fine gold be worth in the coin 720
livres, the marc of fine gold, or 4608 grains, will be worth 801 livres
12 sols.

[Sidenote: Mint price of a marc of fine gold.]

But the mint price of fine gold is 740 livres 9 sols 1 denier.

The difference, therefore, between the mint price of fine gold, and the
worth of it in the coin, (viz. 61 livres 3 sols 2 deniers) will shew
exactly the price of coinage.

If we ask how much this makes _per cent._ we may state it thus,

                    740.409 : 801.68 :: 100 : 108.2.

[Sidenote: The price of coinage 8⅕ per cent. upon gold.]

So in France there are 8.2 _per cent._ deducted for coinage of the gold.

By the foregoing calculations it appears, that the King takes above 8
_per cent._ upon the coinage both of gold and silver.

[Sidenote: Which no way stops the mint.]

For many years past there have been no violent methods used to bring
bullion to the mint, and yet we see, by the dates upon the French coin,
what great quantities have been struck both of gold and silver. This is
a most convincing proof, I think, that the imposition of coinage, when
properly laid on, is no interruption to the mint; and being a matter of
fact well determined, is a confirmation of that principle.

[Sidenote: Of the proportion of the metals.]

Let us next examine the proportion between the value of the metals, both
in the coin and at the mint.

For this purpose we must compare the mint prices in one equation, and
the value of the gold and silver coin in another.

[Sidenote: How to discover it.]

At the mint, a marc of fine silver is paid 51.162 livres, and a marc of
fine gold 740.409 livres; consequently 51.162 : 740.409 :: 1 : 14.47.

A marc of fine silver, in the coin, is worth 55.38 livres; a marc of
fine gold, in the coin, is worth 801.68 livres. We may therefore state
thus, 55.38 : 801.68 :: 1 : 14.47.

[Sidenote: The proportion is as 1 to 14.47.]

The proportion, therefore, both at the mint and in the coin is the same;
and is nearly as the French writers state it, to wit, as 1 is to 149⁄19,
but more exactly as 1 to 14.47, which is very nearly as 1 to 14.5.

[Sidenote: Gold contained in a louis d’or, and silver in a crown of 6
           livres.]

From these computations we find the exact quantity of fine gold in a
louis d’or, and of fine silver in a great crown, or piece of 6 livres.

In the louis d’or there are 137.94 grains fine, and 153.1 standard gold.

In the great crown there are 499.22 fine, and 550.843 standard silver.

[Sidenote: Proportion of a French grain weight to a troy grain.]

Farther, by the most exact calculations I have been able to make, after
comparing the accounts which French writers give of the proportion of
the English troy grain, with the grain of the Paris pound, and the
accounts which English writers give of the proportion of French grains,
with those of the troy pound; and after checking these accounts with the
most accurate trials, by weighing and taking a mean proportion upon all,
I find that a French grain _poids de marc_, is to an English grain troy,
as 121.78 is to 100. See the table. What a shame it is, that such
proportions can only be guessed at by approximations, in the age in
which we live!

To discover, therefore, the number of troy grains of fine gold in a
louis d’or, state thus, 121.78 : 100 :: 137.94 : 113.27.

[Sidenote: Proportion between the louis and the guinea.]

Now a guinea contains 118.651 troy grains of fine gold, and yet, in
almost every country in Europe, the louis d’or, in time of peace, passes
for as much as the guinea, when both are of good weight. This is a
matter of fact well known, and is a confirmation of another principle
which I have laid down, to wit, that the imposition of coinage gives an
advanced value to a nation’s coin, even in foreign countries.

[Sidenote: Of the fineness of French wrought plate.]

The fineness of the French silver wrought into plate, is different from
that of the coin. The fineness of the coin we have said to be 10 deniers
and 21 grains, or 261 parts fine, to 27 alloy; and the value of a marc
of it (when the 36 grains of remedy of weight is deduced) is 49 livres
16 sols, which makes the full marc of 4608 grains to be worth 50 livres
4 sols. The standard of the plate is 110⁄24 deniers, or 274 fine, and 14
alloy. In order, therefore, to find the value of the plate, at the rate
of the coin, state thus, 261 : 50.2 :: 274 : 52.7; consequently silver
plate in France, at the rate of the coin, is worth 52 livres 14 sols.

When goldsmiths sell their plate, they ought regularly to charge, for
the metal, the current price of the market; but as that is constantly
varying, the King, for their encouragement, has fixed the value of the
marc of it at 52 livres, which is only 14 sols per marc below the value
of the coined silver, including the price of coinage. Consequently, were
goldsmiths to melt down the coin in order to make plate of it, they
would lose 14 sols per marc, besides the expence of reducing the melted
coin to the standard of the plate. Goldsmiths, therefore, in France,
will never melt down the coin when they can find bullion in the market,
at the price of 14 sols per marc below the value of the coin; and we
have seen that the price imposed on coinage generally reduces the
bullion to near 8 _per cent._ below coin: but supposing them to melt it
down, there is no loss to the state, because the coinage is already
paid.

[Sidenote: Goldsmiths profit by the imposition on coinage,]

By this regulation, goldsmiths profit by the imposition of coinage;
because the mint price of silver being 8 _per cent._ below the value of
the coin, and that keeping the price of bullion low, goldsmiths gain
upon the sale of their wrought plate, all the difference between the
price they pay for bullion when they make their provision of it, and the
price they are allowed to sell it at when wrought.

Another consequence of this regulation is, that there is no competition
occasioned between the mint and the goldsmiths, to the prejudice of the
latter. No body will carry bullion to the mint while there is the least
demand for it to make it into plate. This consequence is plain.

[Sidenote: And never find the mint in competition with them for the
           metals.]

Bullion can never fall lower than mint price; consequently, the mint may
rather be considered as receiving the bullion upon an obligation to pay
a certain price for it, than as demanding it in the market. The smallest
demand, therefore, from the goldsmith, will raise the price of bullion
when it stands at mint price; because he who has it, will never give it
to any body who has occasion for it, without some small advantage above
what the mint must give him for it; but the mint price being fixed, no
competition can come from that quarter, and therefore the advanced price
the goldsmith gives must be very small.

[Sidenote: Advantages of the French regulations.]

Upon the whole, the regulations in France appear (so far as I comprehend
them) admirably well contrived to serve every purpose. They prevent the
melting down and exporting of the coin; they prevent bullion from being
coined, when it cannot remain in the kingdom; they give an advanced
value to that part of the nation’s coin which must be exported for the
payment of the balance of trade; and they recall it home when the
balance becomes favourable. They prove an encouragement to the industry
of goldsmiths; there is a sufficient check put upon their melting down
the specie; and there is no discouragement given to private people from
making plate, because the silver in the plate is sold by the goldsmith,
a small matter below its intrinsic worth when compared with the coin.

The only thing to be reformed is the remedies allowed by the King upon
the weight and fineness; because it tends to perplex calculations, and
is not at all necessary. When exactness can be procured, it ought to be
procured; and as the workmen regularly profit of all the remedies
allowed them, it is a proof that they have no occasion for any
indulgence to make up for their want of dexterity.

I shall make no mention of the duty of _controle_ upon wrought plate.
This I consider as an excise upon a branch of luxury; consequently, the
examination of it belongs to the doctrine of taxation, and is foreign to
that of money.

It has been said above, that the imposition of coinage (occasioning the
coin of France to circulate, almost at all times, above its intrinsic
value as bullion, even in foreign countries) prevented bullion from ever
rising in the Paris market to the price of coin. This principle I also
find confirmed by facts.

[Sidenote: High price of bullion in the Paris market during the year
           1760.]

Foreign gold of 22 carats fine, sold in the Paris market (December 13th,
1760) at 712 livres the marc. In order to find the value of the marc of
fine gold, state thus, 22 : 712 :: 24 : 776.7. Now the marc of fine gold
in the coin, we have seen to be 801.12 sols. So at this time, when
France is engaged in a most expensive war, while she is daily exporting
immense quantities of both gold and silver coin, to pay her armies and
subsidies, the price of gold bullion in her market is 24 livres 18 sols
per marc below the value of her coin. Nothing but the advanced value of
her specie in foreign currency, could possibly produce such a
phænomenon. But when she was sending stamped ingots of gold to Russia,
in the month of September last, the price of the gold bullion of 22
carats then rose to 734 livres per marc, which for the marc of fine gold
makes 800 livres 14 sols, which is but 18 sols below the value of the
coin. The reason is plain: the coin sent to Germany, or Holland is
constantly returning to France, or at least may soon return, which
supports the high price of it in these countries; but what was sent to
Russia was plain bullion.

Before I conclude this chapter, I must say a word concerning the wearing
of the French coin by circulation.

[Sidenote: Present state of the wearing of the French silver coin.]

As paper money has no currency in France, by any public authority, all
payments must be made in coin. For this purpose the silver is more
commonly used than the gold; from which I am obliged to conclude, that
the silver must be somewhat over-rated in the coin, above the proportion
of the price of gold in the Paris market; but of this I have no exact
information.

The silver coin is put up in sacs of 200 great crowns, value 1200
livres. This sum on coming out of the mint, weighs, according to the
following equation, 23 marcs 7 ounces 152 grains. State thus, 8.3 great
crowns = 4572 grains standard silver; consequently, 200 = 110168.6 = 23
marcs 7 ounces 152 grains.

These sacs, according to my information, weigh constantly at least 23
marcs 7 ounces, exclusive of the sac; so that the French silver currency
has not, at this time, lost above 152 grains upon the sac of 1200
livres, which is about 137⁄1000 per cent. This is a trifle upon a small
sum; but as no difference, however small, is a trifle upon a large sum,
a limit ought to be set to the farther diminution of the weight of the
currency, which might be accomplished easily, by ordering all sacs of
1200 livres to be made up to the weight of 23 marcs 7 ounces effective,
for the future. This would be, at present, no injury to the public,
there would be a sufficient allowance given for many years circulation
of the coin, and the degradation of it in time coming, would be
effectually prevented.


------------------------------------------------------------------------


                              CHAP. VIII.
    _Of the Regulations observed in Holland, with regard to Coin and
                               Bullion._


[Sidenote: Present state of the Dutch currency.]

It comes next in order to examine how this matter stands in the states
of the United Provinces, and with this I shall conclude.

We shall here find the question infinitely more involved in
combinations, than hitherto we have found it. We shall find the most
sagacious people in the world, with regard to trade and money,
struggling with all the inconveniencies of an ill regulated coinage, and
an old worn out silver currency; carrying on their reckonings by the
help of agio; weighing their specie; giving allowance for light weight;
buying silver with silver, and gold with gold; as if it were impossible
to bring the value of these metals to an equation; and loading commerce
with an infinity of brokers, Jews, and cashiers, without the aid of
which it is impossible in Holland either to pay or to receive
considerable sums in material money.

It is very true that what must appear an inextricable perplexity to a
stranger, is really none at all to the Dutch. Trade is there so well
reduced to system, and every branch of it so completely furnished with
hands to carry it forward, that the whole goes on mechanically, and
though at a great additional expence to trade in general, yet at none to
the merchant; because he regularly sums up all this extraordinary
expence upon his dealings, before he superadds his own profit upon the
operation. Were therefore all this unnecessary expence avoided, by a
proper regulation of the coin, the consequence would be, to diminish the
price of goods to strangers, as well as to the inhabitants, to leave the
profits upon trade, relative to the merchants, exactly as before; and to
increase, considerably, the trade of the republic, by enabling them to
furnish all commodities to other nations cheaper than they can do, as
matters stand; but were this plan put in execution, the consequence
would also be, to take bread from all those who at present live by the
disorder, which ought to be removed.

                 Of the regulations in the Dutch mint.

[Sidenote: Regulations in the Dutch mint.]

The unit of weight in the Dutch mint, is the marc _Holland’s troes_, or
gold weight.

[Sidenote: Their unit of weight is the marc Holland’s troes.]

This weight is about 1½ _per cent._ lighter than 8 ounces English
weight, without coming to the most scrupulous exactness.

This marc is divided into 8 ounces; every ounce into 20 engles; every
engle into 32 aces or grains. The ounce therefore contains 640, and the
marc 5120 aces. By this weight, bullion is bought, and the coin is
delivered at the mint, or weighed in circulation, when weighing is
necessary.

[Sidenote: The _remede_ of weight on silver.]

The mint delivers the silver coin by the marc weight; but from the full
weight, there is deducted as a _remedy_, one engles and one ace, or 33
aces: so the marc of the mint, by which they deliver the silver,
contains 5087 aces, in place of 5120.

[Sidenote: The fineness of silver is different in different coins.]

The fineness of the Dutch silver is various, according to the species. I
shall here, for the greater distinctness, take notice only of the
fineness of the florins; because it is the best and the most standard
coin, used in the payments of foreign bills of exchange, leaving the
other varieties of their specie to be considered afterwards.

[Sidenote: Florins are 11⁄12 fine with one grain of remedy.]

By florins I mean (besides the florin pieces) those also of 30 stivers,
and the 3 florin pieces, the standard of which is all the same, to wit,
11⁄12 fine with one grain of remedy.

[Sidenote: How they reckon their silver standard.]

The mass of silver in the Dutch mint, (when we speak of the fineness) is
supposed to be divided into 12 pence, and every penny into 24 grains, as
in France.

Any mass of silver, therefore, of whatever weight, is supposed to be
divided into 288 parts; consequently by 11⁄12 fine with one grain of
remedy, is meant, that there are 263 of these parts _fine_, and the
remaining 25 parts of _alloy_. This is the exact standard of the Dutch
florins.

To find therefore the number of grains of fine silver in the marc
weight, as it is delivered at the mint, we must state this proportion,
288 : 263 :: 5087 : 4645.4.

[Sidenote: Exact quantity of fine silver in a marc weight of Dutch
           florins as they come from the mint.]

The marc therefore of coined silver florins, after all deductions for
alloy, and for remedies of weight and of fineness, contains of fine
silver 4645.4 aces Hollands troes.

This marc is ordered to be coined into 237⁄331 florins. If therefore
4645.4 aces of fine silver be worth 237⁄331 or (in decimals, for the
sake of facilitating calculation) 23.2024 florins, then the full marc or
5120 aces of fine silver will be worth 25.572 florins by this analogy,
4645.4 : 23.2024 :: 5120 : 25.572.

[Sidenote: Mint price of fine silver.]

But the mint price of the marc of fine silver is 25.1 florins. The
difference, therefore, between the mint price of fine silver, and the
price of it in the coin, will shew exactly the expence of coinage. State
thus,

    The price of a marc of fine silver in the coin     _fl._ 25.572
    Price of ditto as paid by the mint                       25.1
                                                             ————
    Price of coinage                                         0.472

To know how much this makes _per cent._ state thus,

                     25.1 : 25.472 :: 100 : 101.48

[Sidenote: Price of coinage in Holland is about 1½ _per cent._ on
           silver.]

So that in Holland there is not quite 1½ _per cent._ taken upon the
coinage of silver florins. Let us next examine the regulations as to
gold coin.

[Sidenote: Of the Dutch gold coins.]

There are in Holland two species of gold coins of different weights,
fineness, and denominations, to wit, the _Ducat_ and the _Rider_; we
must therefore examine them separately.

[Sidenote: The ducat has no legal denomination.]

The ducat is what they call a _negotie pfenning_, that is, a coin struck
under the authority of the state, in all the mints, and of a determinate
weight and fineness; but not a legal money in payments, because it has
no _legal_ denomination.

Ducats are delivered by the marc weight as the silver; but there is a
remedy of weight deducted of one engle per marc. So the marc of ducats,
as delivered by the mint, weighs but 5088 aces.

[Sidenote: The fineness 23 carats 8 grains.]

The fineness of the ducats is (as in the empire) of 23 carats 8 grains;
but in Holland they allow one grain of remedy.

[Sidenote: How the fineness is reckoned.]

The standard of the gold is reckoned by carats and grains: 24 carats are
called fine gold, and every carat is divided into 12 grains; so let the
mass of gold be of what weight soever, it is always supposed to contain
288 parts, that is, 12 × 24: at this rate the fineness of ducats is 283
parts fine gold, and 5 parts alloy.

[Sidenote: Fineness of the ducats of the empire.]

The imperial ducats ought to be 284 parts fine, 3 parts silver, and one
part copper, without any remedy; but in Holland the assayers bring the
gold to the fineness of 23 carats and 8 grains; then they suppose that
what remains is all silver, and they take their remedy by adding one
grain of copper. Dutch ducats are therefore something in the fineness,
though nothing in the weight below the regulations of the empire.

[Sidenote: Exact quantity of fine gold in a marc weight of Dutch ducats
           as they come from the mint.]

To find the number of grains of fine gold in the marc weight, as it is
delivered from the mint, we must state this proportion,

                      288 : 283 :: 5088 : 4999.6.

The marc, therefore, of gold coined into ducats, after all deductions
for alloy, and for the remedies of weight and fineness, contains 4999.6
aces of fine gold. This marc is ordered to be coined into 70 ducats.

If, therefore, 4999.6 aces of fine gold, be worth 70 ducats, then the
full marc of 5120 aces of fine gold will be worth 71.687 ducats, by this
proportion, 4999.6 : 70 :: 5120 : 71.687.

[Sidenote: Mint price of fine gold.]

But the mint price of the marc of fine gold is 71 ducats.

The difference, therefore, between the value of a marc of fine gold in
ducats, and the price given by the mint for the same quantity of fine
gold bullion, shews the expence of coinage. State thus,

  Price of the marc of fine gold in ducats           71.687   ducats
  Mint price of the marc ditto                       71
                                                     ——————
  Price of coinage                                   0.687

To know how much this makes _per cent._ state thus,

                      71 : 71.687 :: 100 : 100.96.

[Sidenote: Price of coinage upon ducats about 1 per cent.]

So that there is not quite 1 _per cent._ taken in Holland upon the
coinage of their gold ducats.

[Sidenote: The price of coinage upon both species should be the same.]

But upon the silver florins there is (as we have seen) near 1½ _per
cent._ consequently, there is an encouragement of 1½ _per cent._ given
for carrying gold to the mint preferably to silver; which, in my humble
opinion, is ill judged. I allow that the expence of coining a sum in
silver is greater than the expence of coining the same sum in gold; but
I think it is better to allow an additional profit to the mint upon the
gold, than to disturb the equality of intrinsic value which ought to be
contained in the same sum coined in gold and silver. But indeed,
according to the present state of the Dutch mint, this small
irregularity is not much to be minded, as we shall see presently.

[Sidenote: The Rider]

_Riders_ are a coin but lately used in Holland. Formerly, the Dutch had
no legal gold coin, silver was their standard; and ducats as a _negotie
pfenning_ (as they call them) found their own value, having no
determinate legal denomination, as has been said.

[Sidenote: has a legal denomination, and is a lawful tender in payments
           to ⅓ of the sum,]

But of late the States have coined this new species of gold, to which
they have given a fixed denomination, and the authority of a legal coin,
to be received in all payments, so far as one third of the sum to be
paid; the other two thirds must be paid in silver: but of this more
afterwards, our present business being to examine the weight,
denomination, and fineness of this species.

[Sidenote: is coined always by the state and for the state; so there can
           be no mint price.]

_Riders_ are coined by the State alone, no private persons carrying
bullion to the mint for that purpose; the coinage, therefore, not being
open to the public, it is in vain to seek for a mint price. They are
delivered at the mint by tale, not by weight; so we must inquire into
the statute weight, fineness, and denominations of this species, in
order to discover the quantity of fine gold which is contained in the
florin of this currency: this we shall compare with the florin in the
ducat, and so strike an equation between the florin in this standard
coin, and in the other, which finds its own price, according to the
fluctuation of the metal it is made of.

[Sidenote: Regulations as to the fineness, denomination, and weight of
           riders.]

A marc of fine gold struck into riders circulates for 374 florins. This
is the regulation as to the weight.

The standard is exactly 11⁄12 fine, or 22 carats, without any remedy.

The denomination is 14 florins for every rider, the half rider in
proportion. To discover therefore the quantity of fine gold in a rider,
we must first divide 374 by 14, which will give the number of riders in
the marc fine, viz. 26.714 riders; then we must say, if 26.714 riders
contain a marc of fine gold, or 5120 aces, how much will one rider
contain? The answer is 5120⁄26.714 = 191.65.

[Sidenote: Quantity of fine gold in a florin of riders.]

Divide this by 14, and you have the number of aces of fine gold
contained in a florin of this currency, 191.65⁄14 = 13.69.

Here then is the exact weight of the fine gold contained in one florin
of the currency in riders.

[Sidenote: To put the ducat upon a par with riders it should circulate
           for 5 florins 4⅛ stivers.]

Let us now examine how much a ducat ought to pass for, in order to be
upon a par with the currency of the riders.

We have seen that a marc of fine gold is coined into 71.687 ducats. That
number of ducats, therefore, to be upon a par with the riders, should be
worth 374 florins. Divide, therefore, this last number by the first, you
have 374⁄71.687 = 5.217 florins, which is a little more than 5 florins
4⅛ stivers.

[Sidenote: Utility of not fixing the denomination of ducats.]

Were the States, therefore, to give a fixed denomination to ducats, they
ought to be put at that value; but the trade of Holland requires that
this coin should be allowed to fluctuate, according to circumstances.
The great demand at present (1761) for _gold_ to send to the armies
preferably to silver, on account of the ease of transportation, has
raised the value of that metal, perhaps ¼ _per cent._ above what it
would otherwise be. If then ¼ _per cent._ be added, it will bring the
ducat to the present current value, to wit, 5.4⅜ florins. If, therefore,
in order to bring the currency of ducats upon a par with the riders,
they were fixed at 5.4⅛ florins, it is very plain, that no more would be
sent away in payment at that rate, because of the present advanced value
of gold; consequently, none would be coined; the mints would be stopped,
and the armies would be paid in guineas and Portugal gold; the melting
and recoining of which keeps all the mints in Holland in constant
occupation.

This, besides employing and giving bread to a number of hands,
multiplies the Dutch currency, at a time when they have so great
occasion for it.

Let us next examine the proportion of the metals in the coin.

[Sidenote: How to find the proportion of the metals in the coin of
           Holland, and a wonderful phænomenon in the value of ducats.]

Here we must adhere closely to the regulations of the mint above
mentioned, and only determine what the proportion of the metals would
be, were the coin of Holland, both gold and silver, of standard weight,
and were it the practice to pay for the metals at the mint,
indifferently in either species. But neither of these suppositions are
to be admitted: First, because the silver coin is not of its due weight;
and in the second place, because the mint never buys gold bullion but
with gold coin, nor silver bullion but with silver coin. This is the
infallible consequence of a coinage ill regulated in what relates to the
proportion of the metals, which ought respectively to be put into the
same sum, in the two different species.

It would be endless to examine the proportion of the metals, with
respect to every species of their coin. It would also be incorrect to
examine it as to the ducats; because that species has no fixed legal
denomination; and the proportion of the metals is to be discovered by
the denomination of the coins only.

Ducats pass current among the people for 5 florins 5 stivers; but with
merchants, who buy them as merchandize, their value is continually
varying. At present (September 1761) the new coined ducats brought in
bags from the mint, which never have circulated, are bought for 5
florins 4⅝ stivers; those which have circulated (were it for a day)
fall, from that very circumstance, to 5 florins 4⅜ stivers; which is a
diminution of near ¼ _per cent._ of their value. This phænomenon shall
afterwards be accounted for.

[Sidenote: Were all the coin of full weight, the proportion would be as
           1 to 14.62.]

This being the case, we have no method left to judge of the proportion
of the metals in the coin of Holland, but by the proportion of fine gold
and fine silver found in the same sum, paid in florins of full weight,
and in new riders; the one and the other coined according to the
regulations of the mint above mentioned.

It has been shewn that a marc of fine gold in riders, circulates for
_f._ 374, and that a marc of fine silver in florins, circulates for _f._
25.572; divide the first by the last, you have the proportion as 1 to
14.62: But we shall afterward discover a circumstance, not taken notice
of in this place, which will reduce the proportion lower.

[Sidenote: Quantity of fine silver in a florin piece.]

From the above calculations, we may easily discover the exact quantity
of fine silver and fine gold contained in a Dutch florin, whether
realized in silver florin pieces, in gold riders, or in ducats. As this
will be of use when we come to examine the par of exchange, it will not
be amiss to set before the reader, the exact state of that particular
before we proceed. We have said that whoever receives _f._ 25.572 in
silver florins of full weight, receives a marc of fine silver, which
contains 5120 aces. Divide the last sum by the first, you have 200.21
aces of fine silver for the florin.

[Sidenote: Quantity of fine gold in a florin of riders.]

Whoever receives _f._ 374 in gold riders, receives a marc of fine gold,
which contains 5120 aces. Divide the last sum by the first, you have
13.69 aces of fine gold for the florin.

[Sidenote: Investigation of this proportion as to the ducat;]

We have seen that ducats fluctuate in their value, having no legal
denomination, which obliged us to state the current value of a marc of
them at 71.687 ducats, not being able to express that value in florins;
because of the unsettled denomination of that species. Let us now
specify that value in florins, upon three suppositions. The first, that
the ducat is worth what it passes for among the people, to wit, 5_f._
5_st._ The second, at the value of new ducats from the mint, to wit,
5_f._ 4⅜_st._ The last, at the merchant price of good ducats, which have
circulated, to wit, 5_f._ 4⅜_st._

In the first case (the ducat at 5_f._ 5_st._) 71.687 ducats are worth
376.35 florins, this being the value of a marc of fine gold in ducats,
and the marc containing 5120 aces; divide the last by the first, you
have 13.604 aces of fine gold for the florin.

In the second case (the ducat at 5_f._ 4⅝_st._) 71.687 ducats are worth
375.04 florins; by which number divide 5120 as before, you have 13.651
aces of fine gold for the florin.

In the last case (the ducat at 5_f._ 4⅜_st._) 71.687 ducats are worth
374.11; by which number dividing 5120, you have 13.685 aces of fine gold
for the florin, which comes within a trifle of the florin in riders.

[Sidenote: by which it appears that the late war has raised the value of
           gold, and set the market price of the metals in Holland at 1
           to 14.785.]

But now (in June 1762) I learn, that the course of new ducats from the
mint in the Holland-market, is got up to 5_f._ 5½_st._ In this case,
71.687 ducats are worth 378.1 florins; by which number dividing 5120, as
before, you have 13.541 aces of fine gold for the florin.

If we seek here the proportion between the gold and silver, we must
state thus. If a florin in ducats contain 13.541 aces of fine gold, and
a florin in silver coin contain as above 200.21 aces of fine silver,
then 13.541 : 200.21 :: 1 : 14.785. So the effect of this war has
already been to raise the value of gold 1.12 _per cent._ above what it
was esteemed to be, when the riders were coined.

The proportion as to riders is, as before, 1 to 14.62.

[Sidenote: Which is a rise upon the value of gold of 1.12 per cent.]

The present proportion as to ducats is 1 to 14.785.

                    14.62 : 100 :: 14.785 : 101.12.

I must farther observe upon this subject, that although we have seen
that the ducats which have circulated for ever so short a while, when
bought at 5_f._ 4⅜_st._ produce for the florin 13.685, (which is more
than is produced by the new coined ducats fresh from the mint) we are
not from this to conclude, that the former are intrinsically a cheaper
currency than the latter. I have been at all the pains imaginable to
weigh these ducats against others fresh from the mint; and also to
compare their weight with what it ought to be by the regulation; and I
have constantly found near ¼ _per cent._ difference between them. This
is entirely owing to the nature of the coin. The ducat has a large
surface in proportion to its weight; it carries a very sharp impression,
full of small points; the cord about the edges is exceedingly rough; so
that the least rubbing, breaking off those small points, diminishes the
weight of the piece near ¼ _per cent._ which is clear loss, not only to
the proprietor, but to the state, and to all the world. Besides, those
who are obliged to go to the mint for new ducats, are supposed to bear
the greatest weight of the coinage of a piece which, having no legal
denomination, is left afterwards to seek its own value, according to
that of the metals at the time.

[Sidenote: The intention of this minute detail is in order to calculate
           the real par of the coins of Europe.]

As I have entred into this minute detail of the weight of fine silver
and fine gold contained in the Dutch florins, with a view to facilitate
the calculation of the par of the metals contained in the coins of
Holland, and those of other nations; I must next mention the proportion
between the aces in which we have expressed the weight of the Dutch
specie, and the grains in use in some of the principal nations with
which they trade: These I take to be England, France, and Germany.

[Sidenote: Proportion between the mint weights of Holland, England,
           France, and Germany.]

The reduction of weights to mathematical exactness, is beyond the art of
man; and to this every one, who ever tried it, must subscribe. I have
been at all the pains I am capable of, to bring those weights to an
equation; and here follows the result of my examination into that
matter.

By all the trials and calculations I have made, I find that 5192.8 aces
Holland-troes; 3840 grains English troy weight; 4676.35 grains Paris
poid de marc; and 4649.03 grains Colonia (which is the gold weight of
the empire) are exactly equal.

I reckon by the lowest denomination of these several weights, to wit,
their grains; to avoid the endless perplexity of reducing to a
proportion, their pounds, marcs, and ounces, which bear no regular
proportion to their grains.

[Sidenote: Par of a pound sterling, in weighty silver, with Dutch
           florins in riders is 11 florins 12 stivers.]

To give some examples of this method of calculating the exact par of the
metals contained in the coin of those nations, reduced to the weights of
Holland, I shall state the following computations.

A pound sterling in silver, by the statute of the 43d of Elizabeth, is
1718.7 grains troy fine; to know how many aces Holland-troes that makes,
state thus, 3840 : 5192.8 :: 1718.7 : 2324.1.

Divide 2324.1 by 200.21, (the number of aces contained in a silver
florin) you have for the par of the pound sterling, _f._ 11.609.

[Sidenote: Par of the pound sterling in gold with ditto, is 11 florins 3
           stivers and ⅕.]

A pound sterling in guineas, by the statute fixing guineas at 21
shillings, contains 113 grains troy fine; to know how many aces
Holland-troes that makes, state thus,

                     3840 : 5192.8 :: 113 : 152.8.

Divide 152.8 by 13.69, (the number of aces contained in a gold florin in
riders) you have for the par of the pound sterling in guineas, _f._
11.161.

[Sidenote: Par of a French louis d’or with the same florin, is 11
           florins 3 stivers and ¾.]

A French louis d’or contains 137.94 grains poid de marc fine gold; to
know how many aces Hollands that makes, state thus,

                  4676.35 : 5192.8 :: 137.94 : 153.17.

Divide 153.17 by 13.69, (the number of aces contained in a gold florin
in riders) you have for the par of the louis d’or, _f._ 11.188.

[Sidenote: Par of 24 livres French in silver with the same florin, is 11
           florins 1½ stiver.]

24 livres French, contain 1996.88 grains poids de marc of fine silver;
to know how many aces Hollands that makes, state thus,

                 4676.35 : 5192.8 :: 1996.88 : 2217.4.

Divide 2217.4 by 200.21, (the number of aces in a silver florin) and you
have for the par of 24 livres French silver, _f._ 11.076.

[Sidenote: Great balance of trade against France, in September 1761.]

The French silver here is less valuable in Holland than the gold: this
is no proof that the proportion between the metals in the respective
coins of these two nations is different (we shall soon find it to be
very exactly the same); but this preference in favour of the French
gold, is owing to the temporary demand for gold on account of the war;
for which reason no French silver coin appears at present in Holland. I
write in September 1761.

I must also observe, that at this time the course of louis d’ors is
11_f._ 4_st._ which is little or nothing above the real par of the metal
they contain; which in peaceable times is not the case. This proves how
strongly the balance of trade is against France with respect to Holland,
as it has reduced her specie to the price of bullion: it is not so in
Germany.

[Sidenote: Low value of the pound sterling in Holland, in 1761.]

The low value which a pound sterling has borne for these several years
in exchange, and the great fall of its worth in Holland of late, when it
has been at 10_f._ 10_st._ is no argument against the high conversion I
have given it, to wit, above 11_f._ 12_st._ Were there nothing but
silver coin in England, and were it all of standard weight, exchange
would frequently run even above that value in peaceable times; because
the silver coin in Holland is light, and I have reckoned it as if it
were of full weight.

It will be observed, that the par upon the gold does not quite amount to
11_f._ 4_st._ the reason of which is the great disproportion in the
British coin, between the intrinsic value of a pound sterling in silver,
and in gold, when both are of standard weight; the latter being near 5
_per cent._ worse than the former, when the proportion of the metals is
supposed to be at 14½. But at present there are no sterling pounds in
silver money; there is no silver in England in any proportion to the
circulation of trade; and therefore the only currency by which a pound
can be valued, is the guinea.

[Sidenote: Owing to the lightness of the gold coin in England at that
           time,]

It has been said, and I think sufficiently proved, that the price of the
metals in the market, shew very exactly the weight of the currency in
nations where coinage is free, when there is no severe prohibition (_put
in execution_) against the exportation of the coin. This I take to be
the case in England. Now gold there has risen of late to 4_l._ 0_s._
8_d._ per ounce; from which I conclude, that the guineas with which it
is bought, or with which bank notes are paid, are at present so light,
that 4_l._ 0_s._ 8_d._ of them do not weigh above an ounce, (the good
guineas are exported) whereas an ounce of new guineas is worth no more
than 3_l._ 17_s._ 10½_d._

Gold, therefore, which now sells for 4_l._ 0_s._ 8_d._ would certainly
be worth no more than 3_l._ 17_s._ 10½_d._ were English gold coin of its
proper weight: and the price of it will come down to that value, in
proportion as circumstances shall call back the heavy guineas.

To facilitate the verification of this point, I shall first observe,
that the difference between 4_l._ 0_s._ 8_d._ and 3_l._ 17_s._ 10½_d._
is 4.57 _per cent._ The English gold currency, therefore, at the time
standard bullion was worth 4_l._ 0_s._ 8_d._ must have been worn 4.57
_per cent._ Guineas, when of full weight, weigh 129.43 grains of troy
weight; if such guineas are worn 4.57 _per cent._ they ought to weigh no
more than 123.23 grains troy. Now let any man try the experiment, and
put an old guinea, taken by chance (not picked out) into a scale, and
see whether it has not been worn down to 123.23 grains; and let him also
examine whether the _greatest part_ of the guineas, at the time when
gold bullion has got to so high a price, are not of King George I. and
his predecessors: these I call old.

Besides these there are other circumstances to be attended to. Men who
job in coin, pick up all the worst guineas they can when they go to
market; or if they buy with paper, we may decide, that the bank at that
time pays in guineas not above the weight of 123.23 grains troy; for if
the bank paid with guineas of a greater weight, he who had occasion to
carry his paper to market to buy gold bullion, would certainly rather go
to the bank, and afterwards melt down their guineas. Were the bank of
England never to pay but in gold of full weight, and were the
exportation of guineas free, it is impossible that gold should ever rise
above the mint price, which is 3_l._ 17_s._ 10½_d._

As a farther confirmation of the justness of the high valuation I have
put upon a silver pound sterling of standard weight, I shall observe,
that a new guinea passes in Holland (at the time when the exchange is at
10_f._ 10_st._) for 11_f._ 11_st._ and every body knows, that such a
guinea in England is not above the intrinsic value of a silver pound
sterling of full weight. If then I can get 11_f._ 11_st._ for a new
guinea, I ought to get as much for a new silver pound sterling, since
the intrinsic value of both is the same, when the proportion of gold to
silver is as 1 to 14½. Now this guinea must be worth more than 11_f._
11_st._ because the Jews, who carry them to the mint, give that price
for them (I have disposed of them to Jews at that value[4]); and as the
coinage of ducats costs, as we have seen, near 1 _per cent._ the guinea
is intrinsically worth 2 stivers more, that is 11_f._ 13_st._ but as
gold at present bears an advanced price upon account of the war, and
that the proportion between gold and silver is in Holland above 1 to
14½, these are the reasons why the guinea, in Holland, is at present
something above the intrinsic value of a silver pound sterling, which we
have stated at _f._ 11.609, a trifle above 11_f._ 12_st._

Footnote 4:

  This was writ in Holland.

[Sidenote: and not to the wrong balance of their trade, as is alledged.]

Let me here observe, by the bye, that all the pounds remitted from
Holland to England, for filling the subscription for 12 millions of last
year, cost the remitters but about 10_f._ 10_st._ for the pound
sterling. If this low course of exchange be owing (as some pretend) to a
wrong balance of trade against England, and not (as I pretend) to the
lightness of the gold currency; then we must allow, that the expence of
the German war (which is what alone carries off coin out of the kingdom)
must have exceeded all the profits of the English commerce, which I
apprehend to be at present immense; and also all the money lent by
foreigners towards the loan of 12 millions. I leave to others more
knowing than myself, to determine if such a supposition be admissible.
If it be rejected, let any man reflect how absurd it would be to raise,
at this time, the standard of the pound sterling to the old value; and
to repay at 11_f._ 12_st._ such sums as have been borrowed at the value
of 10_f._ 10_st._ or in other words, to make a present to the Dutch
creditors of above 11 _per cent._ upon account of a loan for a year or
two.

[Sidenote: Defects of the silver currency of Holland.]

Having now given as good an account as I can of the Dutch coin,
according to the regulations of the state, I shall next point out the
defects of their silver currency, and shew the consequences which result
from them. As for the gold, it is at present perfectly well regulated.
The riders are all exact in their weight, fineness, and denomination;
the ducats are all now recoined of legal weight and fineness; and the
denomination not being fixed, they serve, in a trading nation, as a
merchandize, of which the weight and fineness are well ascertained. The
only defect, therefore, I can discover in the Dutch gold currency, is
the form of the pieces. They have too much surface in proportion to
their weight, and the impression is too sharp; both which contribute
greatly to the wearing of the coin.

[Sidenote: Account of this currency.]

The silver currency of Holland is of two sorts. The bank species, and
the current species. Here it must be observed, that by bank _species_ is
not meant Amsterdam _banco_, or bank money, but certain coins which are
called _bank species_. These are,

                       Pieces of    3 guilders.
                       —————        30 stivers.
                       —————        20 stivers.

These are called _groff gelt_, as being the good specie, of which
hitherto we have only spoken. Sums to be paid in bank species, must be
composed of ⅔ of this currency, and of ⅓ of what follows, viz.

      Riders of 14 florins.
      Dutch half crowns of 28 stivers.
      Ses t’halves of 5½ stivers.

I have put in the riders, though a gold coin, in order to give a
compleat enumeration of all the kinds of these bank species.

[Sidenote: Regulations for the payment of foreign bills in coin.]

Foreign bills drawn on Rotterdam in banco (i. e. bank species) are often
received _there_, in any of the above species, without regard to the ⅔
which ought to be groff gelt; but when the holder of the bill desires
the acceptor (which the latter cannot refuse) to write it off to his
credit in the current bank of Rotterdam, and that he has there no stock,
then, if he brings in specie to the bank, it must be as above specified.

[Sidenote: Ditto for current bills.]

Current bills, not specified by the word _banco_, are generally paid
according to the following proportion:

      3⁄10 in schillings of 6 stivers.
      1⁄10 in dubleties of 2 stivers.
      6⁄10 in good silver.

[Sidenote: Ditto for merchandize.]

Merchandize are paid with all kinds of Dutch silver, ⅒ only in
dubleties, and ⅓ gold, less or more, or sometimes none, according to
agreement.

[Sidenote: The denominations of the several silver currencies not
           proportioned to their intrinsic value.]

From this exposition of the matter, it is very evident, that all these
currencies must be of different intrinsic values, in proportion to their
denomination; otherwise, why all this trouble about regulating the
proportion to be received in payments? [Sidenote: Cause of this.] This
proceeds from two causes: first, from the wearing of the pieces; the
second, from the disproportion of the fineness in pieces of the same
weight and denomination.

[Sidenote: Regulations concerning the weighing of silver species in
           banks current.]

As to the first, to wit, the wearing of the coin, I shall observe, that
the three denominations of the good silver, to wit, the 3 guilder
pieces, the 30 stiver pieces, and the 20 stiver pieces, are put up
promiscuously in the same bags; being of the same fineness, and
consequently of the same value, in proportion to their weight. These
bags contain 600 florins each, and the legal and full weight, with which
they are weighed at the bank current of Rotterdam, is 25 marcs 5 ounces
and 10 engles. Now the exact weight of a florin, according to the
regulation, is, as we have said, 200.21 aces fine; then the 600 florins
ought to weigh 120126 aces fine, which at the standard of 263 parts fine
to 25 alloy, is 131545 aces standard: by this analogy, 263 : 120126 ::
288 : 131545; which is equal to 25 marcs 5 ounces 10 engles and 13 aces.
So the weight at the bank is but 13 aces lighter than in strictness it
ought to be; which is so small a difference, that it could hardly turn a
scale with such a weight suspended in it: for which reason, I suppose,
it is left out, for the sake of the even reckoning of 25 marcs 5½
ounces.

Did these bags of silver coin come up to the full weight, then the
silver currency in Holland would be good as to those pieces; but as the
greatest part of them are old, having been struck with the hammer, and
are of unequal weight, having been coined (_al marco_) in the old
fashion, when coin was weighed by the marc, and not as at present piece
by piece, it is impossible they should be of legal weight: the bank,
therefore, allows 2 ounces of remedy in receiving those sacs, that is,
they put 2 ounces into the scale with the sac, and if they find that the
sac is still light, but that the deficiency does not exceed one ounce
more than the remedy, they throw out the coin and reckon it over; and if
the tale be just, and that none of the pieces appear to have been
clipped, they receive it as if it were of due weight: if it prove above
3 ounces short of the just weight, they do not receive it.

[Sidenote: All allowances for light weight are an abuse.]

Here is a palpable abuse, from a disorder in the coin. If a sac is ever
so little too light, why allow it to pass, as if it were of due weight?
Nothing is so easy as to order such deficiency to be made good by the
deliverer. Weights are made for exactness, and all remedies are aukward
and incorrect.

This allowance must open a door to malversations in a country like
Holland, where there is almost no milled silver coin. The old hammered
money was not weighed at the mint, as has been said, piece by piece: it
was sufficient that every marc of it answered to the legal denomination:
under such a regulation, it is very plain, that there must be many
pieces above the legal weight, as well as many pieces below it. Is it to
be supposed that money-jobbers will not profit of that inequality, by
reducing the heavy pieces to their standard weight, when by such an
action they cannot be convicted of any crime? This is one abuse.

By reducing the heavy pieces to their legal weight, the currency is
degraded; because that which is taken from these ought to be left to
compensate what the light pieces fall short. The bank, therefore, by
giving the remedy, gives a kind of sanction to this malversation.

[Sidenote: Frauds of money-jobbers in Holland.]

Farther, if a money-jobber gets some sacs above the current weight, is
it to be doubted but he will reduce them as near as he can to the lowest
weight received at the bank? And if he should mistake, and reduce them
too low, he has still an expedient for cheating the public, which shall
be mentioned presently.

[Sidenote: The best silver coin in Holland is, upon an average, 1 per
           cent. too light.]

Now let us suppose, that the specie we are speaking of is, upon an
average, only 2 ounces _per_ sac below the standard. If it be no more,
this circumstance does great honour to the money-jobbers. Such a
deficiency, however, amounts to within a mere trifle of 1 _per cent._ Is
not this an object of great importance, upon all the silver specie of
Holland; especially as the remedy given by the current bank, is a tacit
permission given to every body who has address, to rob so much from all
the weighty coin?

[Sidenote: From which it follows, that the actual proportion of the
           metals in their coin is as 1 to 14.479.]

Now let us, by the way, correct the former calculation we made upon the
proportion of the metals in the Dutch coin. We said above, that a marc
of fine gold in riders circulated for _f._ 374, and that the same weight
of silver circulated for _f._ 25.572, which gave for the proportion 1 to
14.62; but here we find that the marc of silver has lost by fraud and
wear 1 _per cent._

Now the marc of silver being 5120 aces, if they have lost 1 _per cent._
there will remain 5068.8 aces. If these 5068.8 aces, therefore,
circulate for _f._ 25.571, the full marc must be worth in the coin _f._
25.83.

In order then to find the exact proportion of the metals in the Dutch
currency, we must divide 374 by 25.83, instead of dividing by 25.572, as
we did when we supposed the silver of full weight. Now 374⁄25.83 is =
14.479. So the proportion is as 1 to 14.479, the same, within a trifle,
of that received in France; which is as 1 to 14.47. But if we attend to
every circumstance, we shall find the proportion still lower than the
last calculation makes it; for in that, we have searched for it with
respect to the best silver specie in Holland; whereas we ought, in
strictness, to calculate the gold, against a mixture of ⅓ of less
valuable specie, with ⅔ of the good: but when computations cannot be
brought to perfect exactness, it is better not to attempt a calculation.

[Sidenote: Another abuse in the silver coin of Holland.]

Before I leave the consideration of the inequality in the weight of the
Dutch currency, I must take notice of another circumstance of
considerable importance.

No payments made in silver, below _f._ 600, are subject to be weighed;
any more than what circulates without being put up in bags. What
restraint, therefore, is there laid upon money-jobbers, with respect to
this part of the currency? When these gentlemen have occasion for money
bagged up, they take care that such specie shall be of the proper weight
to pass at the current bank, and as for all that is light, they either
employ it in payments below _f._ 600, or throw it into the common
circulation. This circumstance presents us then with two sorts of silver
currency in Holland; that which is bagged up, and weighty; and that
which is not, and light.

If we consider the trade of Holland, and the prodigious quantity of
payments made in current money, we shall find the quantity of silver
which circulates in loose pieces very small, in proportion to that which
is bagged up: the regulation therefore of weighing the bags is of
infinite importance; and were it not for that, the currency would be
debased in a very short time. But the cashiers, who are the great
depositaries of this currency, being obliged to deliver the bags of the
legal weight, they are thereby restrained from tampering with it: and
the bagging up, greatly preventing the wear, supports tolerably well the
weight of this old currency of hammered money.

[Sidenote: Reason of the great apparent scarcity in Holland of silver
           coin.]

To people who do not attend to all these circumstances, there _appears_
a prodigious scarcity of silver currency in Holland. It is there as
difficult to get change for ducats, as it is in England to get change
for guineas; and yet, upon examination, we shall find, that the
intrinsic value of the silver coin, commonly given in exchange for the
gold species, is far below the value of the gold.

[Sidenote: A paradox to be resolved.]

Here then is a paradoxical appearance to be resolved; to wit, How it can
happen in trading nations, such as England and Holland, that in the
exchanging light silver coin for weighty gold coin, people should be so
unwilling to part with the silver, although really of less value than
the gold.

This is the case in both countries: thus it happens in England, where
there is so little silver currency; and the case is the same in Holland,
where there is a vast deal. Let me therefore endeavour to account for
these political phænomena.

Since the time I composed the former part of this inquiry into the
principles of money and coins, I have found, by the trials I made in
Holland upon the weight of the English silver currency, that shillings
are at present (1761) far below the weight of 1⁄65 of a pound troy,
which is what they ought to be, in order to make 21 of them equal in
value to a new guinea, according to the present proportion of the
metals. It is therefore demanded,

1_mo_, How it comes about that such shillings do not debase the value of
the English standard below that of the gold?

2_do_, Why are they so difficult to obtain, in change even for new
guineas, which are of more intrinsic value every where? And,

3_tio_, Why money-jobbers are not always ready to give them in exchange
for new guineas?

These appearances seem inconsistent with the principles above laid down;
and a reason must be given why these principles do not operate their
effect in this example.

[Sidenote: Solution of it.]

I answer, that circumstances are infinite, and must constantly be
attended to; and there are in the case before us several specialities
not to be overlooked; I shall therefore point them out, in my answers to
the three questions, as they lie in order.

As to the first, I answer, that these shillings are in so small a
quantity, in proportion to the gold species, that they cannot be
employed in _payments_. Now it has been said above, that _exchange_ (in
trade) regulates the value of the pound sterling, and considers it as a
determinate value, according to the combination of the intrinsic worth
of all the several currencies, _in proportion as payments are made in
one or the other_. Now (generally speaking) no commercial obligations
are acquitted in silver. I do not understand by the word _payments_, a
few pounds sterling sent from farmers in the country, perhaps in
payments of their rents to their landlords; nor what falls into the
public offices, in the payment of taxes. It is trade alone, and the
payment of bills of exchange between different countries, which can
ascertain the true value of that currency in which mercantile payments
are made. Were these worn-out shillings in such plenty as to allow bills
of exchange to be acquitted in them, I make no doubt but they would fall
below the value of the 1⁄21 of new guineas; every one would be glad to
dispose of them for guineas, at the rate of their currency; and guineas,
then, would be as difficult to be got for silver, as silver is now to be
had for guineas. This would bring the standard still lower than it is at
present; that is, below the value of the gold: but as payments cannot be
made in shillings, their currency cannot affect the standard.

The second question is, Why they should be so difficult to obtain in
change for guineas, which are above their value?

I answer, that it is not the intrinsic worth of the light shillings
which makes them valuable, and difficult to be got; but the utility they
are of in small circulation, forces people to part with their guineas
for a less valuable currency. These shillings I consider (now) as
_marks_, not as material money, fitted to a standard. Every body knows
the difference between _marks_ or _counters_, and _specie of intrinsic
worth_. The copper coin of most nations is marks, and passes current,
although it does not contain the intrinsic value of the denomination it
carries; nor ought it to be a legal tender in payments above a certain
sum. Such a regulation preserves its usefulness for small circulation,
and prevents it, at the same time, from debasing the standard, and
involving in confusion the _specific currency_ (as I may call the gold
and silver coins) when properly proportioned, and of just weight.

But shillings in England, although they be at present in a manner no
better than marks, because of their lightness; yet in the eye of the law
they continue to be lawful money, and a legal tender in payments. It is
therefore of great consequence that such shillings be not in too great
plenty. That would have been the case, had government come in to the
plan proposed for the coinage of shillings below the standard; such
shillings would have been coined abroad, and run in upon England, to the
great detriment of the nation; and although they had been proscribed in
payments, beyond a certain sum, yet they would have been so multiplied
in small payments, as to have furnished a means of buying up the gold
coin, and carrying it out of the country for an under-value. Whereas the
worn shillings do not produce that bad effect, from the scarcity of
them, and from the impossibility of imitating them in foreign mints[5].

Footnote 5:

  It is commonly believed that shillings are coined at Birmingham, and
  that government winks at the abuse, because of the great scarcity of
  silver in England. I find no foundation for this belief, after the
  inquiry I have made.

  In the first place, Mr. Harris, who was the best assay-maker in
  Europe, told me, that a bag of those shillings had been sent to the
  mint by the Lords of the Treasury, to be tried by him: that he had
  found them to be English standard, to the most scrupulous exactness:
  that he did not believe any such correct assay could be made, except
  at the mint: that all the engravers of the mint declared it was
  impossible to imitate a worn shilling.

  The trials I myself made were of a different nature. I examined the
  shillings with a magnifying glass; and found almost every one
  different in the impression, as well as in the weight. In some the
  back-part of the head was worn, in others the face: none, in short,
  were worn perfectly alike.

  I put a handful of them into a coal fire; and taking them out when
  red-hot, and throwing them on the hearth, I plainly discovered, on
  many of them, some part of the arms of Great Britain appearing in the
  cross upon the reverse, in a different colour from the ground of the
  coin: in others indeed nothing could be seen: this was owing to the
  degree of wearing. How then can any dye strike an impression upon a
  coin, which answers all these appearances?

  I communicated to Mr. Harris the trials I had made, and he was
  perfectly satisfied, upon the whole, that no old shilling had ever
  been counterfeited at Birmingham.

The answer to the third question, viz. Why money-jobbers are not always
ready to give old shillings for new guineas? is easy, from what has been
said. They cannot pick them up below the mean value of the currency;
because of the great demand there is for them in exchange for guineas;
therefore they can gain nothing by providing them for that purpose.

It comes next in order, to solve a similar phænomenon in Holland, where
there are great quantities of silver specie, and yet one can hardly find
change for a ducat, except in a shop, where one has occasion to buy
something.

This mystery is easily resolved. The great quantities of silver in
Holland consist of what is put up in bags of due weight, according to
the regulations mentioned above. This part of their currency is about ½
_per cent._ better, in intrinsic value, than ducats at 5_f._ 5_st._ tale
for tale; which is a sufficient reason not to part with it, in change
for ducats at that rate. But besides this bagged up bank specie, there
are many other sorts of old worn-out coin, of unequal weight and
fineness.

These serve as marks for the small circulation, and are not a legal
tender in all payments; such as foreign bills. What is the consequence
of this? Since this old specie carries denominations above its value,
when compared with the bagged-bank-silver coin, it serves to buy up this
good silver, when it falls into circulation; that is, it serves to buy
up, or to exchange, florin pieces, which are, as I have said, ½ _per
cent._ better than ducats at 5_f._ 5_st._ Such good silver pieces are
not very common in ordinary circulation; but as it frequently happens
that people receive silver in sacs, for their daily expence, who do not
mind the difference of ½ _per cent._ when they pay in this good money,
it circulates for a little time, until it falls into the hands of those
who know it, and bag it up again. Thus it happens in Holland, from the
disorder of their coin, that you may be paid a million sterling, if you
please, in good silver coin; and yet you find difficulty to procure
silver for a ducat, in the lightest, basest, and most aukward pieces
imaginable for reckoning. The bad consequences resulting from this
disorder, have been taken notice of in the proper place.

                         END OF THE THIRD BOOK.

------------------------------------------------------------------------

                                   AN

                                INQUIRY

                                INTO THE

                   PRINCIPLES OF POLITICAL OECONOMY.

------------------------------------------------------------------------

                                BOOK IV.
                          OF CREDIT AND DEBTS.

                                PART I.
                       OF THE INTEREST OF MONEY.

------------------------------------------------------------------------


                             INTRODUCTION.


I come now to inquire into the principles of credit; a subject already
introduced in the 27th chapter of the second book, where I examined the
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
question now comes to be, what that credit is; upon what it is founded;
what the various species of it are; what the methods of establishing and
extending it, while in its infancy and vigour; how to sustain it when
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 infancy, 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; a thin
vapour, which 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 that 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; such individuals appear to be of very
small consequence; and yet it is by the accumulation of many small
things 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 that 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 Missisippi’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 that
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 even 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 premised, I proceed to the definition of credit.


                                CHAP. I.
                 _What Credit is, and on what founded._


Credit is the _reasonable expectation entertained by him who fulfills
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 only promises to give or 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 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 infancy, 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, 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 extricate the combinations 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 unlimited; 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 that 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 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, was 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
Missisippi, and the stability of it from 1726 to the year 1759,
abundantly proves, that nothing is 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 stipulations 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 that 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, when a state can be benefited by deliberately departing,
for one moment, from the faith of her engagements. A national bankruptcy
may (no doubt) happen, and become irreparable; but that 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 that basis; but
this confidence must have for its object a _willingness_ and a
_capacity_ in the debtor to fulfil his obligations.


------------------------------------------------------------------------


                               CHAP. II.
_Of the Nature of Obligations to be performed, in Consequence of Credit
                                given._


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
that 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 latter, 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, 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, 1. for one precise sum; or 2. 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 that light, the exacting of interest for it
appeared unreasonable.

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

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

We have said in the second book, that the current money of a country is
always in proportion to the trade, industry, consumption, and
alienation, which regularly takes 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
so soon again as this paper augments beyond that proportion, a part of
what was before in circulation, must return upon the debtor in the
paper, and be realized anew.

Now let us 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.

When this _regorging_ 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 proves that circulation is not, at that time, fully
stocked; 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, and lock that up in his coffers, 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 it begins to diminish in a country.

Let me next suppose, that in a country reasonably stocked with money, a
sudden demand for it, far beyond the ordinary rate of circulation,
should occur: suppose a war to break out, which absorbs, in a short
time, more money than, perhaps, all the coin in a nation can realize.
The state 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 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, 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 to the demand of industry, then the
state has no occasion to pay back capitals; and the public creditors
enjoy far better conditions in their annual income, than if the 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 equal to the alienation 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 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; would not, by the supposition, a sum nearly equal to that
coin immediately fall into stagnation, and would it not be impossible to
draw any income from it? 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 treasure, as
was the case of old, we find a huge sum of public debts. As oeconomy
filled the treasury then, so oeconomy must pay off the debts now.

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


------------------------------------------------------------------------


                               CHAP. III.
                      _Of the Interest of Money._


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

The Jews, by the laws of Moses, were forbid to lend at interest to their
brethren, but it was permitted to lend to strangers. _Deut._ chap.
xxiii. ver. 19, 20. This was 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 at interest was
certainly reputed to be unlawful on most occasions. That spirit of
charity, _to all who were in want_, was so warped 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 deviated 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 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, to limit the general anathema 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 case almost, except in obligations bearing a
stipulation of interest for sums demandable at any time after the term
of payment; and it is as yet no where considered as essential to loan,
or demandable 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
forbid. While people borrowed only in order 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, by turning it into
trade, it was very natural to consider the lender in an unfavourable
light; because it was supposed that the money, if not 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, could not be done; forbidding the loan upon interest, has
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 forbid, 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, relative 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 that matter, we may decide 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.


------------------------------------------------------------------------


                               CHAP. IV.
       _Of the_ Principles _which regulate the Rate of Interest_.


We must now recal 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 is demanded to be borrowed,
than there is found to be lent, the competition will take place among
the borrowers. Such among them who 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 exceeds the demand of the borrowers,
the competition will be upon the other side. Such of the lenders, who
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
of.

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:
I suppose those principles understood, and well retained, by those who
read this chapter; and confine myself here to what is peculiar to the
demand for money.

The price of commodities is extremely fluctuating: they are all
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, relative 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 prices of subsistence, that the only thing
which can fix a standard there, 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, _anno_ 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 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 cotemporary, Francis I. of France, _anno_ 1522, (who was the first
who borrowed money in a regular manner upon the town-house of Paris)
fixed the interest at the 12th penny, that is, at 8⅓ _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 when in the most urgent distress: those who lent to him, foresaw the
danger of being plundered if they refused, 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 for such purposes,
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 there is no credit; without credit there is no
borrowing of money, no trade, no industry, no circulation, no bread for
the lower classes, no luxury, not even the conveniencies 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 take 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, 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 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 that 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 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 stopt, 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 them, 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 a large quantity
of solid property into circulation, 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;
the little trade they have, continues to produce great profits, which
are incompatible with foreign commerce: this may, indeed, make the coin
they have circulate for home consumption, but can bring nothing from
abroad.

On the other hand, when trade and industry flourish, and a monied
interest is formed, in consequence of melting down of solid property,
and still more when a state comes to contract great debts, were the
money lenders to attempt to raise the rate of interest to the standard
of the spendthrift, the demands of trade, &c. 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 it into a
competition for the lands which dissipation brings to market; and so by
raising the value of these, they, 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 the 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
is to be lent, and if people are 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 take 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, has 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, we find the laws of any country, in our days, defective
in establishing a facility in securing money on 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 they are not
always at liberty to explain them. An example of such clogs upon credit
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 be to promote domestic
luxury only, and thereby raise the price of labour and industry, the
case is widely different. This observation is only by the bye. Our
object at present extends no farther, than to point out, that the
dissipation of landed men, and the credit they have to borrow money,
influences, 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.


------------------------------------------------------------------------


                                CHAP. V.
              _Of the Regulation of Interest by Statute._


From the principles deduced in the preceeding 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, a regulation becomes necessary 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; 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 entring 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 phænomenon 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, Child has a right to stand in
the foremost rank) we shall find very little attention bestowed upon
that most necessary and ruling principle.

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 that
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 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, _anno_
1625, from 10 to 8 _per cent._ that in place 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 out 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
natural revolutions 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, 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 oeconomy; 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 into 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 of 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 combination of all our
political circumstances.


------------------------------------------------------------------------


                               CHAP. VI.
 _What would be the Consequence of reducing, by a British Statute, 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 only refer to contracts
of loan entred into by private parties.

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 falls to 89, then the value
of money rises to near 4½: if the same stock rises to 114, then the
value of money falls to about 3½; 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, without alledging 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,
&c. 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 run upon the landed interest, 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, even supposing that 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 acted upon 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 impress the nation with a belief, that high interest
for money, in place of being hurtful, was essential to their prosperity.

I have said above, that supposing 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._) that 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 that 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 moves 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 that nature, only for a few weeks, 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 combination among themselves to lock up their money, even although it
should remain dead in their hands for a few months? What would 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 receives it at the highest legal
interest? These and many more inconveniences _might_ manifest
themselves, were government to force down the value of money, contrary
to 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 in states where credit is so
well established, that their funds or public debts are commonly
negotiated abroad, there is an average fixed 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 make a trade of 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 that 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 will be no harm in diminishing the
latter by statute, not however _quite_ so low as the conventional
standard; but 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 by statute: and had he lived
at this time, I am persuaded he would have come into that opinion.


------------------------------------------------------------------------


                               CHAP. 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 vestige of a doubt in the
mind of any one, the writings of many, much more capable than I can
pretend to be, and among the rest the author just now cited, are
sufficiently capable to remove it. I shall not therefore trouble my
reader with a chapter upon that 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, that circumstance would give an advantage to that 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 that respect works a good effect.

In proportion as alienation augments, money comes to be multiplied, by
the melting down of solid property, as has been explained; and then the
business of a statesman is 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 useful, for
supporting public credit, so necessary for defending a nation against
her enemies.

If money consisted only 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
what rate of interest they thought fit for the use of them.

But if that be not the case, and if money can be made of paper, to the
value of all the solid property of a nation, (so far as occasion is
found for it, by the owners of that property) the use of the metals
comes to 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 is 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
combinations 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 body 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, does he not go to a bank, which
lends upon mortgage, and by pledging his security, does he not 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 that 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 every where.

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, that he may attend to one thing; which is, that I am
not here treating of, or proposing a plan, but labouring in the
deduction of 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 that is not expressed) upon the
security of his land? Now, can any man assign any other reason but
custom, why his own notes, carrying expresly 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 that
interest? Not that he has gratuitously received any value from the bank;
because in his obligation he has given a full equivalent for the notes;
but the obligation 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 had agreed 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 only 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 there might, in every way such a plan could be
laid down, result inconveniencies to the landed interest, yet still
these inconveniencies would hardly counterbalance that of their 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 money’d interest alone
would borrow among themselves for the purposes of trade, (for money’d
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 do not incline 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 combination, or, which is more
probable, from the opposition of the money’d interest, he must take
other measures for striking out, as much as possible, the competition of
spendthrifts at the money-market. Entails, and lame securities, are good
expedients; though they are productive of many inconveniencies. His own
frugal œconomy 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
regorging money would be sent abroad. Is any state ever 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: consequently, the lower
interest is found abroad, the lower still it will remain at home, as
long as merchants and exchangers 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, in proportion to their neighbours.

In Child’s time, they 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
it as low as possible every where.

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

The only foundation 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, should not pass
on its opposite bank, though running through the same country?

The reason indeed is very plain: the subaltern jurisdictions 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 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 is 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 in the greatest 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.


------------------------------------------------------------------------


                              CHAP. VIII.
 _Is the Rate of Interest the sure Barometer 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 intricate
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 when commerce runs
favourably, and when unfavourably for a nation. This would not be the
case, were the rate of interest the just barometer 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 of this proposition, as of the course of exchange; the
lowness of interest and 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, and were the difference of the price of the
materials or first matter, the ease in procuring them, the promptitude
of payments, the industry of the manufacturer, and his dexterity,
reckoned for nothing. But such advantages are frequently found in these
articles, as to be more than sufficient to counterbalance the additional
interest which is 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 far is it
not from truth to say, that all _trade_ is carried on with borrowed
money? When the term _trade_ here made use of, is properly understood,
we shall see, that a very inconsiderable part of its object 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. If any one will consider
the value of these two articles, before they come into the hands of
merchants, and compare this with the money borrowed by farmers and
manufacturers, in order to bring them to market, the proportion will be
very small.

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 surprizing 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 that, 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 only due from the time 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
barometer 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 so soon as the _general
average_ of interest comes to stand above that rate, from the price of
public funds in England and France, we may safely conclude, that their
trade cannot 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 believe it will be found, that what has led some to
believe that low interest is the barometer 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 _that_,
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 being what absorbs the stagnations of
the frugal, the price of interest will fall to that rate which is the
best proportioned to the profits upon it: 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.


------------------------------------------------------------------------


                               CHAP. IX.
      _Does not Interest fall in Proportion as Wealth increases?_


I answer in the affirmative: providing it be supposed that dissipation
does not increase in proportion to the wealth. Now in a general
proposition, such as this which stands at the head of our chapter, that
very necessary proviso is not attended to, and thus people are led to
error. It is the manners of a people, not their external circumstances
as to riches, which render 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 still
stand high, until manners 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 that 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.


                         END OF THE FIRST PART.

------------------------------------------------------------------------

                                   AN

                                INQUIRY

                                INTO THE

                   PRINCIPLES OF POLITICAL OECONOMY.

------------------------------------------------------------------------

                    BOOK IV. | OF CREDIT AND DEBTS.

                      PART IV. | OF PUBLIC CREDIT.

------------------------------------------------------------------------

                    BOOK IV. | OF CREDIT AND DEBTS.


                                PART II.
                               OF BANKS.

------------------------------------------------------------------------

                                CHAP. 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 we consider them relative to their policy, I divide them into banks
of circulation, and banks of deposit. This every one understands.

If according to their principle, they are established either on
_private_, or _mercantile_, or _public credit_.

This last division I must attend to 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.

1_mo_, 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.

2_do_, 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.

3_tio_, 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 liberate 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.

1_mo_, 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; as it rests upon the liability of certain fundamental
maxims of government. Mercantile credit is still more difficult to
establish; because the security is the most precarious of any: it
depends upon opinion and speculation, more than upon a fund provided for
repayment of either capital or interest.

2_do_, 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 value in the hands of the debtor, sufficient to satisfy
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.

3_tio_, The third difference is with regard to the ease of transfer.

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, 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, in which case alone, the creditor can
effectually transfer without the consent of the debtor.

4_to_, 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, will give
a very great shock to mercantile credit over all Europe: and nothing
will hurt public credit, so long as the stipulated interest continues
regularly to be paid, and so long as the funds appropriated for that
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.


------------------------------------------------------------------------


                               CHAP. II.
                          _Of private Credit._


Private credit is either real, personal, or mixed.

Real security or credit, 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 creditors. 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, so far as they
affect the banker, and the banking stock pledged for the security of the
paper: and in the second place, upon the securities, real and personal,
granted to the banker for the notes he lends, which afterwards enter
into circulation.

The ruling principles 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 appretiating every subject
affectable by debts; and secondly, of melting it down into symbolical or
paper money.

In former times, when circulation was confined, 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 only differed from public
credit in this, that the solid property producing the income, was really
in the hands of the debtor. This subdivision we have omitted, as its
basis rests solely upon the regular payment of the interest. Of this
nature are the contracts of constitution in France, and the old
infeftments of annual rent in Scotland. There are few nations, I
believe, in Europe, where a vestige, at least, of this kind of security
does 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; as we have abundantly explained in the 27th chapter of
the second book; and therefore I shall not here interrupt my subject
with a needless repetition.


------------------------------------------------------------------------


                               CHAP. 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 I
have often observed of subjects of a complex nature, they 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 are better discovered by an
examination of the principles upon which we find banking established,
than by any other method I can contrive. It has been by inquiry 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 circulation.
This induces me to think that the best way of communicating my thoughts
on that subject, is to lay down the result of my inquiries relative 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, those 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 other.

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, is settled upon one or other of them.

In countries where trade and industry are in their infancy, credit must
be little known; and they who have solid property, find the greatest
difficulty in turning it into money, without which industry cannot be
carried on, as we have abundantly explained in the 26th chapter of the
second book; and consequently the whole plan of improvement is
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
that 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 those 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 all the operations of the Scotch banks, while 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 only
to England, 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 in 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 that 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 them 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 entring 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 [6]_solid property_ may be melted down. By the
means of banks, money may be constantly kept at a due proportion to
alienation. If alienation increases, more property may be melted down.
If it diminishes, the quantity of money stagnating, will 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.
These must pay for the country the balance of their trade with foreign
nations. These keep the mints at work; and it is by their means,
principally, that private, mercantile, and public credit, is supported.
I can point out the utility of banks in no way so striking, as to recall
to mind the surprizing 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 that man produced, in two years time, the most
surprizing 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.

Footnote 6:

  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 our combinations, in proportion to
  the circumstances under which we reason.


------------------------------------------------------------------------


                               CHAP. IV.
       _Of Banks of Circulation upon Mortgage or private Credit._


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 those
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 even varies according to circumstances, as we shall
afterwards observe.

The profits of the bank proceed from the interest paid upon all the
securities which have been granted to it, in consequence of credits
given, and which remain with it unretired.

Out of which 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 providing it; and
thirdly, the expence of transacting and paying all balances due to other
nations.

In proportion, therefore, as the interest upon the bank securities
exceeds the loss of interest on the coin in the bank, the expence of
management, and of providing 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 regards the bank, it is their original property; and so
far as 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, for articles of present consumption; or in precarious
trade.

When paper is issued for no value received, the security of such paper
stands alone upon the original capital of the bank, 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, in place 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, is secured on good private security; that security carries
interest to 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 of paying in the
metals. Coin may be wanting, upon some occasions, to men of the greatest
landed property. Is that any 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 of 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 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
it in virtue of the notes which circulate through their hands.


------------------------------------------------------------------------


                                CHAP. 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 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 one are as readily paid as 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. 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[7].

Footnote 7:

  It must be observed, that in this example, the banker who issues his
  notes upon mercantile security, is supposed to grant a permanent loan
  to the merchant or manufacturer, as he would do to those who pledge a
  personal security. This is totally repugnant to the principle of banks
  secured on mercantile credit. Such banks never grant loans for
  indefinite duration, upon any security whatsoever. They will not even
  discount a bill of exchange, when it has above two months to run.


------------------------------------------------------------------------


                               CHAP. 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 only proves, that banks are not, alone, sufficient for
carrying on every branch of circulation. A truth which no body will
contravert. 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 that 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 that 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 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 ½ _per cent._ or more, according to
circumstances, over and above the interest of their advance; 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: if
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 give way, 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 lay their account with 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 would not have introduced it.


------------------------------------------------------------------------


                               CHAP. 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 book of Mr. Law, there
was a very necessary clause added; 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 inconveniencies which might
result to either party, by an arbitrary 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 the generality of people 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 coin is not absolutely necessary for carrying on domestic
circulation, and more will be said on that 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, of 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 them. The loan is made in their own notes;
which are quickly thrown back into circulation by the borrower; who
borrowed, because he had occasion to pay them away. In like manner, when
a credit is given, the bank pays (in her notes) 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; and 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 writ 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, discounting of bills, and in
buying gold and silver 7,333,333⅓ pounds, which at 3 _per cent._
interest or profit, will amount to the above 220,000 pounds, and remains
3,666,666⅔ 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 on any other, except that of the bank itself; which, it would
appear, has some interest in keeping those affairs a secret.

We see by his account, that the bank of England keeps in coin ⅓ 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 balance, the notes which the bank had issued to
support domestic circulation _only_, come upon it for payment of a
foreign 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 of 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 inconvenience 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 only 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.


------------------------------------------------------------------------


                              CHAP. 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 that 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 that be mostly bank paper, he must give the
bank paper to the exchangers for a bill, whose business it is to place
funds in those parts upon which bills are demanded. The exchanger again
(to support that 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 nation 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 to other nations.

These three 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 at the charge
of banks.

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


------------------------------------------------------------------------


                               CHAP. 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
that 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 by them to foreigners, 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 further
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 infinite 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 land 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 conducing 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.


------------------------------------------------------------------------


                                CHAP. 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; 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, can remove the inconvenience; and
if recourse be had to credit, instead of the loan, the same difficulty
will recur, whenever that credit 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 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 that, or to pay in coin.


------------------------------------------------------------------------


                               CHAP. 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 that 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. The 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 that 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, or of its notes, to
draw from it their coin, in order to export it. This throws a great load
upon the bank, which is constantly obliged to provide a sufficient
quantity 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 in coin, or stop payment.

It cannot, therefore, be said, that exchangers do wrong; nor can they be
blamed, in 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 is due, must constitute the rest of the world
debtors to the country which sends out their coin. The consequence of
this is 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 that operation,
for the same reason that they _gain_, by 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 are sometimes sending
their money out of the country, at a time when it is already drained of
its coin; that 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 by sacrificing a part of the interest due upon the
obligations in their hands, secured upon the solid property of the
country, and by the means of foreign loans upon that fund, to 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 general 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 it, 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, in favour 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?


------------------------------------------------------------------------


                               CHAP. XII.
       _How the Payment of a wrong Balance affects Circulation._


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, manufactures, modes of living, and the customary
expence of the inhabitants, when taken all together, 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 will go on without any payment at all, until
accounts are cleared; and then nothing will be paid, but 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 is
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 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 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, are paid either in coin, 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, 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 that question: all we
need to say is, that it is the profit of banks to accustom people to the
use of paper as much as possible; and therefore they will draw to
themselves as much coin as they can.

When a favourable balance of trade brings 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 to make (A) regorge, so as to sink the
interest of money below the bank lending price; and then 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 that 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, _cæteris
paribus_, so will money; that is, more solid property will be melted
down; and when trade and alienation diminish, _cæteris 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; only the operation is more aukward and expensive. When coin
becomes scarce there, it is hardly possible, in remote provinces, to
find any credit at all: and in the center of circulation, the use of it
(interest) must rise very considerably, and 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, and 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 it from coming into the hands of
those who would have occasion for it, did they but know where to come at
it. Paper, 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.

We must 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, in order to pay it, must either
exhaust a part of (B), by sending it away, or they must carry a 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 which have been paid in coin 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, issued to fill up (C) to the
level, is 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 the 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 the value
of these additional securities granted for them into coin or foreign
bills.

Is not this quite consistent with reason, fact, and common sense? If a
country contracts debts to foreigners, is it not just the same case as
when one man contracts a debt to another in the same society? Must not
the ultimate consequence of this debt be, that it 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 not
sufficient; or when land, or an annual and perpetual income out of it,
must make up the deficiency; then 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. This the bank of St. George at Genoa has operated with
regard to Corsica, as has been observed. But in that case, banks never
could neglect laying down a plan whereby to avoid the loss 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 _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 it again to come, (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 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[8].

Footnote 8:

  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.

But banks in prosperous trading nations sit down with casual and
temporary inconveniencies; 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 an option to refuse 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 point of combination, 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, that 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 so 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 suspend 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
of 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 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.

Such management can only be prudent when the circulating notes of a bank
are very few, and when the balance is very great. In that 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
notes to exceed the balance due, then all the hurt which can be done is
done already; and the more notes are issued, and the more credit is
given, so much the better; because the interest upon all that is 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 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 have a command of credit and coin equal to the sum of (B)
and (D). If they have the value of (D) in any foreign place, where a
general circulation of exchange is carried on; then they have only
occasion for (B) at home, and can furnish bills to the amount of (D).

If (D), in consequence of bills drawn, shall come to be exhausted, the
bank must replace it again, by new contracts, to strangers.

But as soon as (D) is paid, either in coin or in bills, then whatever
coin is drawn from the bank, and sent away by private people,
(exchangers, &c.) must form a balance due to the country; which balance
will render exchange favourable, and will occasion a loss to those who
sent away the coin. In this case, the more credit the bank gives, so
much more will their profits increase.

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 to 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; consequently, 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.


------------------------------------------------------------------------


                              CHAP. 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
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 and 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 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, so far as is necessary for keeping up the
fund of 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 that
means avoid abstraction 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, 1. to import considerable quantities
of grain in some bad years; 2. to refund the English loans of money
settled there in former times; 3. to furnish some of the inhabitants
with funds, which they thought fit to place in England; 4. 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, 1. a
great part of the industrious inhabitants who went to supply the fleets
and armies; 2. the absence of the ordinary contingent of troops; and 3.
the cutting off several beneficial articles of commerce. Let me suppose,
I say, that from a combination 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 am far
beyond the true computation.

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 alienated
annually in favour of England, a fund for paying the interest of two
hundred thousand pounds capital, and either brought down the coin, or
given bills on London for the sum of that capital every year; that the
million of Scots currency would have been diminished in proportion to
the deficiency; and would not the consequence of that be, _cæteris
paribus_, to bring the currency below the demand for it; and,
consequently, to hurt trade, industry, and alienation?

Now supposing the banks, instead of providing, 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 coin and bills to supply the demand of exchangers, whose
business it is to send out this annual balance; what will 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 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 bank (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
phænomenon 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 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 only the circulation of the industrious, of the rich,
in short _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 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 rendring 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
such a drain it will not be in great plenty, expedients must be fallen
upon. In such a case, if the bank does 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, with an obligation to pay, as government does, quarterly[9], 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 those operations will land in the end (as to
the bank) in paying the interest of 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
nowise diminished; there will be no call extraordinary, no rising of
exchange; the bank will have _this_ in its hands; and if it rises, it is
the bank, not the exchangers who will profit by it.

Footnote 9:

  Although the interest or dividends on government securities be paid
  every half year only, yet by purchasing partly in one fund, and partly
  in another; for instance, half in Old South Sea annuities, and half in
  New, purchasers may have their interest paid quarterly.

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 will 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 will obtain six months credit
at London, and in consequence of that, their bills will be honoured and
paid. This credit costs them money, which is added to the exchange: the
bank, at the end of six months, pays in coin, which in the interval it
must provide from London. It pays 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, &c. expence to the bank in providing coin, expence to the
exchangers in returning it; after all, I say, the operation lands 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 that sum in England upon a
permanent fund. Instead of which it compensates the interest of a
temporary loan, with the same sum of interest taken out 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
results to itself a loss equal to the interest of what it refuses to
lend; that is to say, there is a _lucrum cessans_ to the bank of the
interest of this 200,000_l._ at 5 _per cent._ or at 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
already given, it still diminishes circulation: but then by that
operation it diminishes the mass of its securities, and so diminishes
the sum of the interest annually paid to itself. If it goes farther and
borrows money at home, such loans will be made in its own paper, which
will diminish farther the mass of circulation; and if it goes on
recalling the credits and mortgages, it will soon draw every bit of its
paper out of circulation, and remain creditor upon Scotland only for the
balance 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 in its own notes, or
recalling the credits it had formerly given.

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

By the second, 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 center 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 all the combinations I have been
able to make, 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 lesser banks to pick
up from _them_ every shilling of coin which these lesser 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 up 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 of recalling 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 of 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 that the principal exchangers reside at Edinburgh, they never can
avoid the loss of paying the balance; and 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 losses they sustain by furnishing coin to the
other banks, and for the payment of the balance; and then compare these
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 lesser 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 that 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 that sum four times a year.

Now the value of a 4 _per cent._ is at present about 96; so in paying
20_s._ _per_ quarter 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
I suppose that they have recourse to exchangers to remit this interest,
and that they 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[10]. 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,

Footnote 10:

  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 remembred, that all those contractions 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.

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 been, she would find as
many difficulties in extricating herself by domestic borrowings, bank
circulation, &c. 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 alledged, 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 suspend, being far beyond the extent of it; and that,
consequently, the paper came back upon the bank, produced a run 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 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 bank 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 might have remained. But in favour of
circulation, or in favour of what might be exacted by foreign creditors,
banks never can misjudge 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, if all her debts to strangers were
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 whenever it is convenient.

I have said above, that after all the combinations I had been able to
form, 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 expediency of calling in the old, and of 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 that 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 is brought so low, 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 shop-keepers 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
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 landlord receives, comes from the farmer, for the
price of his grain, &c. 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, proves, 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
inconveniencies from an unexpected change of bank management; but as
long as there is a demand for such commodities, there will be a supply;
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 alledged, that in the beginning of the year 1762, when
the Edinburgh banks withdrew ¼ of all their cash accompts, and opened a
subscription for borrowing-in 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?

If, therefore, it was 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 63¼: 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 74½, 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 that
fund. 100_l._ produced in Scotland 5_l._ interest, that 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 ⅕ _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
smalness of the sum advanced, upon which the profit was made, and the
ministerial interest which was necessary to obtain a share in those
subscriptions, rendred 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 to that 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.”


------------------------------------------------------------------------


                               CHAP. 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 a certain space of 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 uncontroverted 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 advantage to the
bank, in prejudice of the holder of the paper (except so far as the
holder is thereby deprived of the use of 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 use
of it, and then compare the advantages with the inconveniencies, in
order to determine whether or not it is expedient to permit such
obstructions in the circulation of paper.

The advantages which banks reap is confined to that of gaining time, at
the expence of paying interest. The interest paid by them is an aukward
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 make use of the optional clause. Could
the banks, therefore, borrow coin in a moment, and pay the same interest
for the coin which they pay to the holder of the note, they would
certainly never make use of this optional clause. But this coin is not
to be found in a moment; and the banks, to save themselves the trouble,
and the expence of augmenting the fund of coin, or of procuring a fund
out of 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 of 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 contractions
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 that 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 carrying on 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.

The expedients they fall upon to obtain credit, coin, and bills, are so
various, and so complicated, that they alone are able to explain them.

Sometimes we see them entring into contracts with private merchants and
exchangers, (_living among themselves!_) who engage for a certain
premium to furnish coin as it is demanded. The consequence of this, is,
to expose the bank to a new demand for coin, from the very contractors,
in order to fulfil their engagements; an abuse we have taken notice of
above in speaking of the _bank circulation_ of England.

Let us suppose that these undertakers for coin do really set out by
doing _in part_ what banks should _effectually_ do themselves, that is,
by bringing from another nation, the coin which they are to supply. What
is the consequence? The banks pay the undertaker for this coin in their
own notes. Did they only engage to pay a certain interest for the coin
so provided, then the end would be accomplished, with the additional
expence to them of paying the undertaker for his expence, trouble, and
profit. But if they, instead of paying interest for the coin so
furnished, shall issue their notes for the full value of it, such notes
can never enter into domestic circulation, so as to be suspended in it
as it were; because it is not domestic circulation which has demanded
them: they must then return upon the bank, either from the very hand who
received them, or at least, after a short circulation; and thus draw out
again the whole coin furnished by the undertaker. This produces a
prodigious circulation of coin, and induces people to imagine that
either the _grand balance_ is inexhaustible, or that the premium upon
money at London is very high, or that people can contrive a fictitious
balance, as a means of profiting upon coin, after the balance has been
actually paid[11].

Footnote 11:

  The directors of the bank of England have had recourse to a like
  expedient with as little success. They used, during the war, to buy
  up, with their paper, the coin brought in by privateers; and after
  they had been at this trouble, the notes they had given for it
  returned upon them, and drew it out again.

This method of providing coin is absolutely delusive, and opens a door
to infinite abuse. Those who furnish the coin to the bank, are either in
the combination against the bank, and draw it out as fast as they throw
it in; or they are not in the combination: if they are in the
combination, they profit by it; if they are not, they are hurt by their
contract, and other exchangers draw the advantage; but the bank is
equally a loser in both cases.

Let me suppose that they are not in the combination, and that they
honestly procure the coin at their own expence. If they are paid in
notes for the coin they furnish, we must suppose that the coin they have
procured, is not in consequence of a loan, but of a _credit_ given them
in the place from which the coin is sent: for I never can suppose that
any merchant will borrow coin upon a _loan_, and lie out of so large a
capital while he has bank notes in his hand to pay up what he has
received. If he has procured this coin upon _credit_, will not this,
when it comes to be replaced, augment the grand balance against the
nation in favour of the country or city which granted that credit? And
must not that balance be paid by exchangers out of the coin received by
the bank? If, therefore, we suppose that the undertaker does not draw
out the very coin he had just delivered into the bank, will not
exchangers do it for him; will not they be ready with notes, as soon as
the coin is lodged in the bank, to draw it out, and send it off, in
order to furnish the undertaker with bills to fill up his credit, for
the coin he had received from people residing in the place to which the
exchangers have sent coin, to be ready to answer their draughts? Does
this differ in the least from what is called drawing and redrawing,
which is sufficient to ruin any man, and must not a like practice ruin a
bank, by raising exchange to a monstrous height?

This being the case, the shortest and the best method of preventing such
abuses, is to oblige banks to pay upon demand, in coin or bills, at the
option of the holder of the note. This will force them into the method
of providing them; to wit, fairly borrowing money from nations to whom
we owe, and paying 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.

We have said, that a statesman should oblige all public banks to pay
regularly upon demand, in coin or bills, at the option of the holder of
the note. But then he must facilitate to them the means which he has in
his power, of providing themselves with the coin, or bills demanded.

For that purpose, he must, first, provide them with a mint, for how,
without a mint, can a bank convert into coin the metals it may provide
from other countries? Next, he must put that mint under such regulations
as to cut off all profit from money-jobbers, who will be ready to draw
coin out of the bank the moment they find the least advantage in
tampering with it. In order to prevent this abuse, a reasonable rate of
coinage should be imposed, according to the principles laid down in the
third book; and when banks have occasion to pay a balance out of the
nation’s coin, a drawback for part of the coinage should be given them.
This drawback will support the value of the coin, and the loss of the
remainder will engage them to export bullion preferably to coin, when it
is to be found: and if no drawback were given, the coinage would be
totally lost to the bank.

When this deduction is given, the coin must be melted down, and stamped
in bars at the mint; both in order to prevent frauds in the drawbacks,
and to disappoint strangers who receive it at the price of bullion, from
gaining the price of coinage when they return it back. And in the last
place, all light coin should be banished out of circulation, and made to
pass by weight for bullion, at the current price of the market. All
banks should both receive and deliver coin by weight, when the sums are
so considerable as to require full bags of coin to pay them. It is not
here necessary to repeat what has been said upon this subject at so much
length in another place.

The method of facilitating to banks the means of providing bills for the
payment of foreign balances, is, secondly, to assist them in procuring
loans beyond the district of their own circulation. If government shall
be satisfied that the intention of demanding such loans, is to enable
the bank to interpose their credit in favour of the trade and industry
of those who circulate their paper, and who have no way of paying such
balances, but with their solid property; in that case, government will,
undoubtedly, assist the bank in obtaining loans for so national a
purpose, by declaring the security upon which they desire the loan to be
good, and by becoming answerable to the public for the solidity of it.


------------------------------------------------------------------------


                               CHAP. XV.
 _Of subaltern Banks of Circulation, and of their Competition with one
                               another._


We have hitherto treated of the principles which influence national
banks of circulation, we now come to examine some peculiarities
attending banks of a subaltern nature, which for the most part trust to
the national bank for all supplies of coin; and when this resource fails
them, they are thereby involved in difficulties which are not easily got
the better of. Besides this inconvenience, to which all subaltern banks
are subject, they are frequently exposed to competition with one
another.

A national bank enjoys such great advantages from the stability of its
credit, and the regularity of its operations, that it is not easy for
any other private company to establish themselves upon the same solid
system.

When any banking company is established, which draws its support from a
national bank, the facility of carrying on the business by so great an
assistance, naturally engages other companies to imitate their example.
From thence arises a competition. All such banks begin to consider the
circulation of their own district as their undoubted property, and they
look with an eye of jealousy upon every note which does not carry their
own mark.

The great point of their ambition is to gain credit with the national
bank; and could they obtain of that company to receive their notes, or
to give them credit for their draughts, in cases of necessity, they
would be at their ease; because the national bank would then be at the
whole expence of providing coin and bills, and they would have nothing
to think of, but to extend the sphere of their own circulation.

With respect to all these subaltern societies, the national bank will no
doubt steer an equal course. I suppose every one to be settled upon good
security; without which they do not deserve the name of banks.

In proportion to their stocks, and according to the state of the
national balance, they may, as well as any private person, on many
occasions, draw considerable supplies of coin from the national bank,
without lying under any obligation to it; because when exchange is low,
they can realize any part of their stock into coin, out of the national
bank, at very little loss, excepting the interest of it: for interest
must always be reckoned upon every guinea which lies in their chest.

Did these banks consider one another in a proper light, they must see in
an instant that the solidity of every one is equally good; because I now
suppose them all standing upon the principles of private, not mercantile
credit, as above explained.

What benefit then can they possibly reap from their mutual jealousies,
from gathering up each other’s notes, and coming with a run upon one
another from time to time? The consequences of this will be, to oblige
themselves and others to preserve for _domestic circulation_ a larger
quantity of coin than is necessary, and thereby to diminish their own
profit: to take up their attention in providing against their own
reciprocal attacks, and thereby neglect the providing a supply for that
demand which is indispensable; to wit, the payment of the grand balance
due to other nations; at which time the resource of the national bank
will certainly fail them. The managers of every one of them will pretend
that it is they who are saddled with this burden; but the nature of the
thing speaks for itself.

Wherever this grand balance is transacted, the exchangers residing in
the place will have recourse to the bank there established; and if there
be more than one, that which pays with the greatest readiness will have
the best credit, the most notes in circulation, and the largest profits
upon the whole. If any one is found slow, or difficult in paying its
paper, exchangers will be the more punctual in making their demand for
payment, and they will even be averse to receiving such notes from their
correspondents.

Every man who has occasion for credit from a bank, will apply to that
whose notes are the most esteemed. In short, there will be profit, in
the main, to the bank which pays the best, although I allow that at
particular times there may be some additional inconveniences, unless a
regular plan be laid down on the principles above deduced.

This however is a vague reasoning; because the matter of fact is not
known. All that can be said with certainty, is, that while no public
regulation is made with regard to banking, every one will carry on the
trade according to his views of profit; and private animosities between
different companies, will only tend to distress the nation and
themselves, as experience has, I believe, discovered.

If, as matters stand, a very great inconvenience results to Scotland
from the want of a communication of paper credit with England, and if
thereby an exchange of 4 and even 5 _per cent._ has been paid for bills
upon London, because all the coin of the country is locked up in banks;
I ask what would be the consequence, if banks had their will in
banishing from the circulation of their own district, every other notes
but their own? In that case, we might, in a short time, find an exchange
of 4 and 5 _per cent._ between Fife and Lothian, between Glasgow and
Ayr, and so of the rest. What would then become of manufacturers, who
could not dispose of their work at the distance of a few miles, without
having recourse to exchangers for their payment? If such an abuse were
once allowed to creep in, there would be no other remedy but to destroy
banks altogether, and throw the little coin there is into circulation.

On the other hand, when banks are in a good understanding, when they are
established on solid principles, when their paper is issued on proper
security, the public is safe; and in every little district, under the
wings of their own bank, there will arise a set of exchangers, who will
give credit to merchants and manufacturers, and who will have recourse
to their own bank for the coin or bills necessary for their occasions.
This will naturally divide the payment of the grand balance among them,
in a due proportion to their circulation.

I shall now consider the principles which may direct a statesman to
settle banking upon mortgage on a proper footing, to serve every
national purpose.


------------------------------------------------------------------------


                               CHAP. XVI.
 _Of some Regulations proper to be made with regard to national Banks._


From what has been said, we may conclude, that were a national bank upon
mortgage, established on a plan calculated to answer the purposes of the
most extensive domestic circulation, it might be regulated in the
following manner.

1_mo_, Let a large stock of property, of one species or other, be
provided, in order to gain the confidence of the public, and let it be
pledged for the payment of all the notes.

2_do_, Let all solid property intended to be melted down into paper
money, be first constituted in such a manner as to be easily sold, and
in the mean time secured to the company, for their advance, preferably
to every other person, and let it be of a revenue fully sufficient to
acquit the interest for ever.

3_tio_, The capitals due to the bank must not be demandable by the bank,
as long as the interest is regularly paid.

4_to_, Every one who constitutes his property according to the
regulations, must be entitled to a proportional credit from them.

5_to_, All bank securities must be pledged in the hands of government
for the interest of whatever money the bank may borrow with their
consent, beyond the district of their own circulation.

6_to_, Government must support the bank in proportion to the extent of
their funds.

7_to_, Let bank notes be payable to bearer, either in coin, or in inland
bills to the value, or in a transfer of a corresponding interest at —
_per cent._ all in the option of the holders.

Were such regulations established, the borrowing from banks would become
very easy; any man who is master of his property, though incumbred with
debts, might put it into bank regulation, might raise upon it what sum
he thought fit, with which all his debts might be paid off; he might
even give credit upon it to those who otherwise are not in a situation
to obtain it: for which credit given, a profit in the rate of interest
might be allowed to him. Were a plan concerted consistently with the
principles which have suggested this general sketch, all borrowing and
lending of money would soon center in the bank. Securities would be
easy, and expence greatly avoided.

A national bank, when rightly constituted, may however be safely
indulged in more extensive methods of circulating their paper than upon
land security. The bank of England is allowed by charter to issue notes
for discounting bills of exchange, it may trade in gold and silver, may
advance money to government upon the security of taxes imposed and
levied within the year. But it is in general debarred commerce, and
every precarious object of traffic. The reason is plain. The paper it
issues becomes the property of the nation, and may form in a short time
the greatest part of the currency of it. In such a case, were the bank
exposed to losses by trade, or insolvency of debtors for great sums, the
whole credit of the nation might be ruined, and all the lower classes of
the manufacturing inhabitants undone, before such a blow could be
repaired.

Under proper regulations, bank paper might be made a legal tender in
every payment: in which case it is hardly possible that any considerable
demand for coin should ever be made upon them, except for the payment of
the _grand balance_.

This national bank may have different offices, in different cities
within the kingdom, and these will make subaltern banks both useless and
unprofitable. It might even be stipulated, that a certain proportion of
bank stock, in the name or for the behoof of any city, should entitle
that city to a proportional part of the administration within their own
district. As these are only speculations, not plans, I need not set
about removing objections, which are constantly many and well grounded,
whenever any new establishment or innovation is proposed. All I aim at
is to set this principle in a clear light, to wit, that it is the
interest of every trading state to have a sufficient quantity of paper,
well secured, to circulate through it, so as to facilitate payments
every where, and to cut off inland exchanges, which are a great clog
upon trade, and are attended with the risk of receiving the paper of
people whose credit is but doubtful.

For this purpose, I have proposed that inland bills should be demandable
from the bank at par, as well as specie.

It would be an admirable improvement upon this scheme, to make a like
regulation as to foreign bills. However, this speculation is reserved
for another opportunity. All I shall say, at present, upon that head,
is, that as we have seen how the whole national balance must be paid by
banks (who circulate paper payable in coin on demand, and who
consequently must, on some occasions, draw the metals from abroad for
that purpose, in order to fill up the void made by exchangers, who send
them out) and it would, I think, be shortning, in some measure, that
operation, and be a means, at the same time, of indemnifying the bank in
this respect, to regulate matters so, that all foreign exchanges might
be transacted there at fixed rates, according to the place where the
exchange is to be made, without erecting any monopoly for that purpose
in favour of the bank, or depriving any one of the liberty to deal in
exchange, who can afford it at more reasonable terms than the bank; but
of this more when we come to the doctrine of exchange.


------------------------------------------------------------------------


                              CHAP. XVII.
  _When and in what case Banks should be obliged to keep open Books._


If no national bank be established under proper regulations, and entire
liberty allowed to every one to take up the trade who can issue his
notes, I think it would be against all principles of good policy not to
oblige such banks to keep open books, to be inspected regularly by some
authority or other; in order to see upon what security that paper
stands, which is the instrument of commerce, a part of every man’s
private property, and which, if any part of it should once fail, either
through the knavery, misconduct, or misfortune, of a particular company,
would cast a general discredit upon all paper, and be a means of
bringing on those calamities which we have so often mentioned.

I know the ordinary objection against this, is, the inconvenience of
throwing open the secrets and mysteries of trade. As to the mysteries of
trade, this point shall be examined in another place. But here, I say,
there is no question of trade in which any risk is implied: and if any
one can suppose, that, at any time, the affairs of a bank are in so
ticklish a situation as not to bear inspection, that very supposition
shews how necessary it is not to permit such a bank to continue this
circulation. The only inspection, in which the public is interested, is
to know the quantity of notes issued, and the extent and nature of the
securities pledged for them. They have no business to examine the state
of their cash, or of particular people’s credit. They may be without a
shilling in their coffers, and still their paper be as good as if they
had a million. Such an inspection, as I propose, would rather confirm
than shake their credit, but it would be a means of preventing them from
launching out into speculations in matters of commerce, which is not
their district; and from gaming with national property.

If it be said, that this inspection would lay open the affairs of many
private men, debtors to the bank, I answer in the negative; because no
man’s credit is hurt by his having a cash account, and no inspection is
requisite, as to the state of that accompt with the bank. The credit may
be either quite full, or quite exhausted; this particular interests no
body but the parties themselves; but it is essential to know upon what
security the credit has been given; because every man who has a note of
such a bank in his possession, has a very good title to be informed
concerning the security on which it stands.

It is not sufficient to say, that the holder of the note, if he doubts
of the security, may demand payment. It is not here the interest of any
individual, but that of the public which is attended to: and if,
according to the principles of common reason, it be just, that a
creditor should have it in his power to watch over the abilities of his
debtor, so as to secure his payment; certainly it is equally just, that
the public (which I consider here as the creditor) should be made
certain, that what is circulating with as great facility as the King’s
coin, contains a real value in it. Would it be a good answer from any
man who held a piece of false money in his hand, for the use of
circulation, to skreen himself, by alleging that if it be false, no body
need to take it. It is the right of every man to detect false coin; but
it is the right of government _only_ to detect false paper: because law
only can authorise such an inquisition. Does not the charter of the bank
of England establish this right in government? If the bank be confined
to certain particular branches of solid trade, where little risk is
incurred, might not government examine, when necessary, whether these
regulations have been observed; and how can this be done without such an
inspection as is here recommended?


------------------------------------------------------------------------


                              CHAP. XVIII.
   _Is it the Interest of Banks to grant Credits and Cash Accompts to
   Exchangers and others, who make a Trade of sending Coin out of the
                               Country?_


The answer to this question is very short.

From the principles we have deduced, it is plain, that it is both the
office and interest of banks to give credit to all who can give good
security for it.

The cause of doubt upon this question, arises only from certain
inconveniences which have been of late experienced in Scotland; but
which never would have been felt, had banks attended to their true
interest, in providing funds to answer the demands of those who are
either obliged, or who find an interest in paying off what the nation
owes upon the grand balance to foreigners.

To set this matter in a clear light, let me suppose that, some time ago,
the banks had at once withdrawn all the credits granted to exchangers;
and opened a subscription for a loan of money, equal to what they might
estimate the sum borrowed by that set of men within the country, for the
sake of carrying on their business.

According to principles, these two operations should go hand in hand:
the recalling the credits would, no doubt, have greatly distressed
exchangers; but as long as they could find money to borrow from private
hands, that inconvenience would have been lessened. Besides, I apprehend
that the late custom among exchangers, of borrowing at 4 _per cent._
owes its existence to the difficulty they felt in obtaining extensive
credits from the bank; and if this be the case, then there has been a
_lucrum cessans_ to the bank of 5 _per cent._ upon the amount of all
these borrowings; because exchangers, I apprehend, would prefer a credit
from the bank at 5 _per cent._ to a loan at 4 _per cent._ payable on
demand, according to the occasions of those who keep their money with
them.

The most effectual method, therefore, to hurt exchangers, would have
been to have recalled all their credits, and offered to borrow, upon the
same terms, what was lent to them.

The execution of such a plan would, I think, have been, 1. diametrically
opposite to the interest of the banks; 2. would have occasioned such a
run upon exchangers, as to throw them into great distress; and 3. would
have ended in the total ruin of the trade of Scotland.

That such a plan is diametrically opposite to all principles of banking,
I suppose, is by this time sufficiently understood.

That it would have occasioned a run upon exchangers, is pretty certain:
because however good their credit might be, it must be acknowledged to
be inferior to that of the banks; and therefore no body would prefer
them for debtors, to the bank, upon the same terms.

The third consequence is as evident, upon a short reflection, as the
other two. The run upon the exchangers would have obliged them to make a
call upon all the merchants and dealers in Scotland, to whom they gave
credit: for which purpose, and for which alone, they find an interest in
borrowing at so high an interest as 4 _per cent._

The call, then, made by the exchangers upon their debtors, is neither
more or less than a call upon the money employed in the trade of
Scotland.

Now we have said, that whoever owes _must pay_. The merchants of
Scotland owe to exchangers; the latter are pressed by their creditors,
and _must pay_ with what they have, which consists in money only: when
that is exhausted, they must shut up shop. _They_ again call upon the
merchants, who _must pay_ with what they have. This consists in goods,
and in the manufactures of Scotland; and these they _must_ sell at any
price. There may not be time sufficient to export with advantage. To
whom then must they sell? To people within the country, who have no
money to buy with; because credit is withheld by that body which only
can give it. I conclude with the old saying of the law,

         _Unum quodque eodem modo solvitur quo colligatum est._

The best method to establish credit in an industrious nation, is a bank
properly regulated: and the best methods to ruin it effectually, when
established, are the inconsistent operations of such a bank.


------------------------------------------------------------------------


                               CHAP. XIX.
_Application of the Principles above deduced, towards forming the Policy
                            of Circulation._


From the principles above deduced, there arise three principal objects
of attention.

The first, the circulation of paper for domestic uses.

The second, the method of providing coin for that purpose.

The third, the method of paying foreign balances.

These three objects are absolutely different in their nature, and they
are influenced by different principles. The consequence of blending them
together, is to render the subject, which is abundantly intricate in its
own nature, still more dark and perplexed. What is to follow has no
relation to any plan proposed for execution; it is only intended as a
farther illustration of the general principles which influence this
branch of my subject.

1_mo_, As to the circulation of paper for domestic use.

It has been said, that the great utility of banks of circulation upon
mortgage, was to facilitate the melting down of solid property; in order
to enable every one who has property, to circulate _the capital_ of it
for the advancement of industry.

For this purpose he comes to a bank, pledges the capital he wants to
melt down, and receives for his obligation, bearing interest, paper
money which bears none.

This paper money, I suppose to be as solidly secured as the principles
of private credit can make it. I suppose the bank to be established by
authority, according to the regulations already mentioned, and the notes
made a legal tender in every payment of _domestic debts_; by which I
understand _debts_ payable within the country.

From these data, I say, that the regular method by which the bank should
acquit the obligation in the notes, is by restoring the security granted
at issuing the notes, if they be returned by the debtor in it; or by a
transfer of a sum of interest equivalent to the notes, if they are
presented by any other. All farther obligations laid upon banks to pay
in coin, or inland bills, is only an equivalent expected from them in
lieu of their great profits[12].

Footnote 12:

  It must here be observed, that in every country where there is a
  national coin established, it is absolutely necessary to connect with
  it the denominations of the paper; in order to affix a determinate
  value to these denominations. This may easily be done without
  implying, as at present, an obligation on the bank to realize into
  coin every bit of paper in circulation.

  The _interest_, therefore, of the credits given by the bank, may be
  demandable from the debtors in coin; and the transfers of interest
  made by the bank, to those who bring in notes for payment, may also be
  demandable in coin from the bank.

  These payments will bear a small proportion to the paper in
  circulation, as interest must be very low; and coming at fixed terms
  of payment, provision will easily be made for them.

  This regulation will support the coin of the country, and as the
  _interest_ of all the paper becomes demandable in coin, the intrinsic
  value of the _interest_ will effectually support the value of the
  _capital_.

When paper issued for domestic circulation returns to a bank, were it
not for the profits on their trade, I see no reason why a bank should
pay in any other species of property than what it received; and if, by
the interest they receive for their notes, they are abundantly
indemnified for all the difference between paying in coin and in
transfer, I think the public would be a gainer to dispense with that
obligation in lieu of an abatement of interest; which would be an
advantage to commerce, not to be counterbalanced by the other.

Farther, the business of providing coin is totally different from that
of supporting domestic circulation: it is founded on different
principles: it requires men of a particular genius to conduct it: the
difficulties to be met with are not constant; and therefore cannot form
a regular branch of bank administration.

2_do_, The method of providing coin for domestic circulation is the
business of mints, not of banks.

I have, in the third book, treated very fully of the doctrine of coin,
and of mints. I have shewn the difference between money, which _is the
scale for reckoning value_, and coin, which _is certain denominations of
money, realized in a proportional weight of the precious metals_. I have
shewn how necessary a thing it was to impose the price of coinage upon
the metals manufactured into coin: and I have said, that it was
inconsistent with all principles, to allege that the metals, when
coined, should thereby acquire no additional value.

The expence, therefore, of providing the metals should be thrown upon
those who want coin; and the mint should be obliged to convert gold and
silver into coin, upon the demander’s paying the coinage.

This coin loaded with the price of coinage, never will be sent abroad to
pay a foreign balance; never will be locked up in banks, which will have
little occasion for it. It will, therefore, remain in circulation, and
serve those purposes for which the inhabitants think fit to employ it.

This coin, I say, never will be exported, as long as any uncoined metals
can be found in the country: and if upon a national distress it is
thought fit to facilitate the exportation of it, the state may (as we
observed above) appoint the mint to receive it back, in order to melt it
down into ingots, stamped with the mark of sterling, repaying to the
bearer —— _per cent._ of the coinage.

3_tio_, The trade of paying off foreign balances will then become a
particular branch of business: of which we shall treat more at large,
when we come to examine the principles of exchange.

All that is necessary to be said in this place, is to recal the
principle we have mentioned above, viz. that when a nation cannot pay in
her metals, manufactures, and natural produce, what she owes to
strangers, she must pay in her solid property; that is, she must
mortgage the revenue of such property, for a capital _borrowed out of
the country_, which capital she must employ for the payment of her
foreign debts.

This operation then should be performed by a regular and systematic
plan.


------------------------------------------------------------------------


                               CHAP. XX.
                     _Objections to this Doctrine._


That bank notes can never be received as specie, but from a persuasion
that they may be exchanged for it on demand.

To this I answer, that it is sufficient they be received as value; and
that they answer every purpose in carrying on alienation. The use of
_money_ is to keep the reckoning between parties, who are _solvendo_;
the use of specie or coin is to avoid the inconvenience of giving credit
to persons who perhaps may not be so.

When merchants make delivery in accompt, they then give credit to their
customers: when they sell for bank bills, they give credit to the bank:
when they are paid in coin, they give credit to no body; because they
receive the real value in the coin. Where then is the difference between
receiving the real value, and receiving an obligation for it, concerning
the validity of which every one in the country is perfectly satisfied?

Is there a merchant, in any country in the world, who will sell one
farthing upon an hundred pounds cheaper to a person who pays in coin,
than to another who pays in good paper; unless the extrinsic
circumstances of the country should, at that time, give an advanced
price to the _metal_ of which the coin is made.

Money, we have said, ought to be invariable in its value: coin never can
be so, because it is both _money_ and _merchandize_: money, with respect
to the denomination it carries by law; merchandize, with respect to the
metal it is made of.

But it is urged, that if I have coin I may pay any where within the
commercial world, at the expence of transportation, and insurance. I
grant this to be true.

But I answer, that the principal use of coin, is, not to send it out of
the country; but to keep accompts clear among inhabitants within the
country. If there be a variation in the value of coin, according to
circumstances, that variation must affect the inhabitants in their
transactions. No one can gain upon this coin, without supposing a
relative loss to some other, whether they perceive it or not. Must not
this disturb all reckoning? Must it not disturb prices? Since at
different times, I may be paying the same denominations of coin for the
same commodity; and yet be paying, really, more value at one time than
at another. Is not then the most invariable money the best calculated
for the interest of trade, and prosperity of manufactures? Whence arise
complaints against paper money, and regrets for want of coin? They issue
from those who both wish to profit of the rising value of the metals
contained in the coin, and who endeavour to persuade the public, that
its interest, and not their own, is their object.

What a trifle is a foreign balance, let it be ever so great, compared
with the whole alienations of a country! Is it reasonable to disturb the
harmony of all domestic dealings, in order to furnish an opportunity to
a few clear-sighted people, who can, upon some occasions, profit of the
fluctuating value of the substance of which the coin is composed, to the
prejudice of the ignorant? If the country owes a balance to other
nations, let it be paid: nothing so just; nothing so essential to the
interest of the country which is the debtor. If the precious metals are
the most proper vehicles, as I may say, for conveying this value, let
them be procured and sent off; but never let us say, that because _some_
of our money _may_ be made of that metal, that all our money should be
made of it; in order that those who transact the balance may have an
opportunity of sending our metals away with greater ease, and thereby of
depriving us of the means of carrying on alienations among ourselves.
Let every one that has coin send it away: nothing can be more just;
nothing more consistent with principles: but let him send it away as a
_manufacture_; carrying in its bosom the price of making it, which he
has paid, and for which his foreign creditors will make him no
allowance.

Exchangers run to the coin of the nation, for paying, with the least
expence to themselves, the balance they are about to transact. When that
resource is cut off by the imposition of coinage, the nation will
preserve at least her darling specie; and then exchangers will be
obliged, by the best of all compulsions, their own interest, to think of
other expedients; bullion, manufactures, and natural produce. And when
all these come to fail, a regular plan must be laid down, and authorised
by government, for obtaining credit in other countries, by mortgaging
the revenue of the solid property of the kingdom; according to the
principles we shall discover when we come to treat of exchange.


------------------------------------------------------------------------


                               CHAP. XXI.
_How by a return of a favourable Balance the Bank may be enabled to pay
 off the Debts due to Foreigners, and thus deliver the Nation from that
                               Burthen._


We have said, that the banks in contracting debts, and mortgaging the
property of Scotland to strangers, for the payment of a grand balance,
really acted as the guardians of the public, by interposing their
credit, and by constituting themselves as debtors for the whole; taking
for their relief, proportional securities upon the effects of
individuals.

We have also pointed out how, by this operation, the mass of bank
securities comes to be greatly augmented.

Before the payment of any balance for the behoof of Scotland, the
securities in the hands of the bank can only be equal to the notes in
domestic circulation, and accumulated profits thereon. Let this be
called (A). In proportion as these notes come back upon the bank, in a
demand for bills to pay balances, in the same proportion is there a sum
of securities added to the former mass (granted upon new credits given
for filling up the void thereby occasioned to circulation) which
quantity I shall call (B).

(A) then represents the securities equivalent to the notes in
circulation.

(B) represents the securities equivalent to the debts contracted by the
bank in favour of strangers.

Now let us suppose trade to become favourable; or that the interest of
the money, which the natives had sent abroad, to invest in foreign
countries, begins to flow back: what will be the effect of this?

I say, that this balance will be paid to Scotland, either in coin, or in
the metals, or in produce, or in manufactures, or in bills.

In every case, it must be supposed to be beyond the consumption of
Scotland; otherwise it will not be a balance in their favour. Whatever
part of it, therefore, proves to be beyond the consumption of Scotland,
will be turned into money. This money must either consist in the metals,
or in foreign bills. If it consist in the metals, it will, if coined,
fill up, _pro tanto_, a part of circulation; this will make a
proportional part of bank paper return upon the bank, and extinguish a
proportional part of their securities; which we have called (A). But
then there will be more coin in circulation than formerly; consequently,
more coin will enter into payments made to the bank than formerly. But
we must suppose, that before this favourable turn of commerce, there was
coin enough both in the bank and in the country for the uses of domestic
circulation; consequently, the bank will send off this superfluity of
coin, and with it they will refund a part of the debt they formerly
contracted.

Through all this chain of reasoning, we must always suppose the money in
circulation to be _a determinate sum_; otherwise the superadding this
foreign balance in coin will not occasion, as we have said, a return of
a proportional part of the bank paper.

In the next place, let us suppose this favourable balance to consist in
foreign bills, upon London, Amsterdam, &c. These will be discounted by
the bank, and notes issued for them. The bills will be sent off by the
bank, in order still to extinguish a part of what is owing to
foreigners. These notes, again, being superfluous to circulation, which
we suppose to be full, will return upon the bank and still diminish the
mass of (A).

By these operations we see how (A) will be constantly diminishing; but
then in the same proportion we see how the mass of foreign debts will
also be diminishing: consequently (B), which was engaged for them, will
be returning to be the free property of the bank; and as we suppose no
variation upon the sum in circulation, we may consider this as a sort of
conversion of (B) into (A), and when all (B) shall be thus converted
into (A), then the debt formerly contracted by the bank, in favour of
Scotland, will be totally paid off by the same method (only inverting
the operations) by which it was contracted.


------------------------------------------------------------------------


                              CHAP. XXII.
      _Of Banks of Circulation established on mercantile Credit._


I have examined, with all the care I am capable of, the nature of banks
calculated for the melting down of solid property, and converting 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, and 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 principally 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 only to be
considered 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 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, 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 60 days, they will not
discount it. So in this case, the merchant must keep his bill until it
is within 60 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 bills, is plainly to
employ the cash in 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 does 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 it happens, 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 derived 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 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 the 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 that 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 the Scotch banks, we have seen how directly contrary to all
principles it is, to borrow money in Scotland. How it diminishes the
profits upon their own trade, and hurts the circulation of the country;
but although it diminishes their profit, it carries along with it no
positive loss to them, as would be the case with a London banker, who
would 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, in case the notes were drawn for obtaining credit, in
place 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
that 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 their 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 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 those debts, for which government allows to the bank a sum
proportionate to the expence of that 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 that payment, which is of a very complex
nature, as any one may perceive. As long as the inhabitants of England
consume exciseable 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 company 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 fail 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 in: 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 so 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 of a wrong
balance upon the trade of England, leaves circulation provided with a
light currency, 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, so 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[13].

Footnote 13:

  See Book III. Chap. 21. Quest. 7.

It is with great diffidence that I propose an expedient to a company so
knowing in the arts and science of trade, for preventing, in a great
measure, this loss in providing the metals for the use of circulation.
The bank is directed by long experience, and by a knowledge of many
facts and circumstances hid from me; and which, therefore, I cannot
combine into a theory founded chiefly upon reason.

The expedient I propose has been pointed out in the preceeding parts of
this inquiry, and I only recapitulate it briefly in this place, to recal
it to mind while we are on the subject of the bank of England.

First, then, while the coin is of unequal weight, the value of the
currency never can be permanently the same. Did the bank seriously set
about forming a plan for the reformation of the coin, I have no doubt
but government, as well as the voice of the nation, would go along with
it in forwarding the execution of so noble a design.

The second step I would recommend, is that government should enable the
bank to establish a fund in Holland, Antwerp, Hamburg, and perhaps at
Cadiz and Lisbon, for borrowing (though at a high interest) sums of
money equal to what may be due by England to the continent upon certain
emergencies.

I cannot pretend to lay down any plan for this operation; but I proceed
upon this principle: that if on like occasions the British government
can find credit to borrow so large sums for the uses of war, at a very
moderate interest, surely the bank of England may imitate her example
for the uses of trade; and had she a credit abroad, upon which she could
draw, I think it must follow, that the coin of the nation might be kept
at home.

I have been an eye witness to large sums in new English guineas thrown
into the melting pots of the Dutch mints, for the small profit of less
than 1 _per cent._ gained by coining them into ducats. A small duty
imposed upon coinage in the English mint, would prevent this practice
abroad; and then British coin would come safe back again, upon every
return of a favourable balance on their trade. At present it comes home
in bullion, which the bank must buy dear; the state must coin at a
considerable expence; and the bank after all must give it to circulation
at the mint price, which is many _per cent._ below prime cost, as
matters have stood for several years.

From this review of the constitution of the bank of England, and of the
principles upon which it is founded, we may discover how impossible it
is, that banks upon mortgage and private credit, can ever receive any
considerable assistance from it; and how groundless all insinuations
concerning its jealousy of such companies must be.

A more natural object of its jealousy is that of the London bankers, who
carry on a trade similar to its own, in many respects, and who, in the
course of their business, draw from it very large quantities of coin.

This, however, occasions no ill will on the part of the bank. The trade
of London requires the assistance of all the bankers there, as well as
of the bank. Were it otherwise, the bank, by discounting bills at a less
profit, might soon oblige them to shut up shop. In this view of the
matter, the drawing coin from the bank cannot be prevented.

The bankers call for no more than their business requires. Could the
bank, therefore, circulate the whole trade of London, the consequence
would be, to issue as much coin as at present: and the coin which issues
from bankers, like to that which issues from the bank, if it be for the
uses of domestic circulation, returns to the bank in proportion as it
issues: and if it be for payment of a foreign balance, the bank knows
well that the expence of providing for _that_, must land upon it, in
spite of every method to prevent it.

I must now explain the difference between the effects produced upon the
circulation of coin, by the operations of banks established upon
mortgage and private credit, and by those of the bank of England, which
we have said to be established upon mercantile security.

The consequence of a bank upon mortgage, is to fill the nation with
paper money, and to reduce the quantity of coin to the lowest sum
possible. For the truth of this proposition, I appeal to the experience
of Scotland, and of Rome, where banks upon mortgage, and moveable
pledges, are found established. From these facts, and from the
principles of their constitution, which is to melt down property into
money, it follows, that when the credit of such money is well
established, the coin, which is the money of the world, will be employed
in trading with the world, and the paper, which is the money of the
society, will be employed in trading with the society.

The consequence of this, is, that when the balance of trade runs against
a country where banks upon mortgage are established, the coin first goes
out; and when, by borrowing, it can be brought back, the interest paid
for the coin borrowed, adds an additional balance against the country,
until the whole revenue of it becomes the property of other nations.
From this we may conclude, that the establishment of such banks is as
dangerous a weapon in the hands of an idle nation, as an extensive
credit is to the family of a young spendthrift.

But let us consider the consequences of such banks to an industrious
people, who preserve, upon the average of their trade, a favourable
balance with other nations.

The coin, then, goes out to return, and serves as a check upon the
course of exchange. I here suppose proper regulations in the mint, and
an entire liberty to export coin. Permitting the exportation of coin
where you have a mint, for paper to supply its place, and a favourable
balance on your trade to bring it back, is like establishing two shops
for the course of exchange. If the exchanger will not serve trade at the
price of transportation and insurance, the coin will do it for him.

In such a country, a bank, properly established, will find great profit
upon the interest of their notes, notwithstanding of the obligation to
provide, at all times, the quantity of coin necessary for circulation.
All the great objects of trade will then be fulfilled; the rest must be
left to the operation of political causes.

If the balance of the trade of such a country should have the effect of
bringing in an addition of coin, which, because of the paper, would
become unnecessary for circulation; this coin, or the value of it, will
either be added to their stock in trade, or will be lent to other
nations. This is the case of the Swiss: they are an industrious and a
frugal people; they receive annually from their trade, and from the
service of their citizens in many countries in Europe, a constant
addition to their wealth, more than their trade demands, which they lend
to their neighbours; by these means they increase the revenue of the
society; and this increase has effects almost similar to an extension of
their territory; because it is a means of increasing their population
beyond the proportion of the natural produce of their lands; and the
food they import from Germany and other countries, is paid with the
money which arises from the interest of what they have lent abroad. All
these operations are the consequences of credit and circulation.

In a country where a mercantile bank is established, the melting down of
property is greatly circumscribed; and consequently coin becomes more
necessary.

We have often said, that a circulating value (money) must constantly
bear a proportion to alienation. Circumstances will determine what
proportion of coin and what proportion of paper will be necessary for
carrying it on. These circumstances, under banks of circulation upon
mortgage, multiply paper so much that little coin is required.

Let us now examine how far the paper of a mercantile bank, like that of
England, tends to supply the demand of circulation.

Were no bank established at London, all bills would be paid, or
discounted in coin.

The bank, therefore, melts down into paper money all the bills
discounted by them, and throws it into circulation.

It also melts down into paper all the sums it advances either to
government, or to the great trading companies. In this respect it acts
upon the principle of banks upon mortgage.

It also melts down into paper all the interest upon the public funds
discounted at the bank. All this sum of paper issues from the bank into
the city of London, and proportionally supplies the circulation of that
great capital.

Let us next examine how this paper can find its way into the country of
England, there to supply the use of coin.

The whole consumption of London for meat, beer, fire, and an infinity of
articles of manufacture for domestic use and foreign exportation, comes
from the country of England.

Did the country owe nothing to London, the sums due for those
commodities would be sent into the country in the current circulation of
London, which, by what we have seen, absorbs a very large quantity of
paper.

But we have said above, that the whole amount of taxes, almost, is
remitted to London in bills: this could not be the case, were not the
capital constantly indebted to the country. This circumstance confines
the circulation of bank notes chiefly to London, and some other cities,
to which the inhabitants of London resort, and whither they carry in
their pockets the money of the capital, viz. bank notes. For these
reasons, bank notes can never be common in the country: and if, at any
time, a scarcity of currency _there_, proves hurtful to industry, the
defect cannot be remedied but by establishing banks of circulation upon
mortgage in the principal towns of England.

It may be here objected that such a regulation in England, where there
is already so great a bank settled on different principles, might draw
along with it the following hurtful consequences, viz.

1_mo_, By multiplying the circulation of paper it would send off the
coin.

2_do_, The taxes would be paid in this paper, which could not be
received at the bank of England, and that would throw the whole nation
into confusion.

To which I answer, 1. That if the coin were sent off, it would return,
as has been said, while the trade of England flourishes: and 2. That
this new bank paper coming in place of the coin, would no more be sent
to London than coin is sent now. The debts due by the country for taxes,
would be compensated by the reciprocal debts due by London for
subsistence, &c. and the compensation would go on as at present by
bills: but were the case otherwise, and did a change of circumstances
oblige the country to make delivery in coin to London, the holders of
the country notes would constantly, as is the case in Scotland, have
recourse to the bank established in the district, for the coin wanted to
be sent to London.

When I accidentally, as at present, happen to apply a principle to a
particular case, whereby an innovation is implied, I constantly fear a
secret rebuke from many impatient readers. I therefore beg a little
indulgence upon account of my good intention, which is only to support
ideas to be approved of, or rejected by those who have the capacity to
form plans upon them, and power to put them in execution.


------------------------------------------------------------------------


                              CHAP. 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; the 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 Missisippi 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’etat_, 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 millions _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.

For the better understanding this affair of Mr. Law’s bank, and the
views he had in establishing it at that time, I must give a short
account of the most material variations of the French coin, before and
after the King’s death, 1st September 1715; which I shall make as short
as possible, consistently with perspicuity.


------------------------------------------------------------------------


                              CHAP. XXIV.
  _Account of the variations of the French coin, some time before and
                     after the death of Louis XIV._


In 1709, there was a new general coinage in France; by which operation
the King gained 231⁄13 _per cent._ upon all the specie coined. (Dutot,
vol. i. p. 104.)

Out of the marc of standard gold were coined 30 louis d’ors, of 20
livres denomination each. Out of the marc of standard silver, 8 crowns,
of 5 livres denomination each: so that the silver was put at 40 livres
the marc.—But,

By edict of the month of September 1713, the old King appointed a
diminution of the denomination of silver and gold coins; by which, after
eleven successive changes, the coin of France was ordered to be brought
down, from 40 livres the marc, to 28: so that the 8 crowns, which were
_called_ 40 livres in the month of September 1713, by the 2d day of
September 1715, (the day after the King’s death) were to be _called_
only 28 livres. I say _called_, because certainly the crowns had
suffered no variation but in their name.

On the 13th of August 1715, (a few days before the King’s death) he
issued a declaration; ordering that for the future the coin should
remain at 28 livres _per_ marc.

From this I conclude, that his intention was to leave, at his death, the
coin of his kingdom of the same standard he had found it to be at the
beginning of his reign, and at which he had preserved it invariably,
during the flourishing state of his kingdom, for the space of 46 years;
that is, until the year 1689.

He could not fail to be sensible of the infinite prejudice occasioned to
debtors and creditors by the variations he had practised upon the coin
from 1689.

To this standard, then, it was brought the very day after his death, and
no sooner: therefore his debt of two thousand millions of livres should
regularly be estimated according to that rate; or at about 40 shillings
sterling for every 28 livres: 40 shillings being, within a trifle, the
value of 8 ounces or one marc of standard silver, Paris weight.

At this rate of conversion, the two thousand millions were equal to
142,857,140_l_. sterling.

Soon after the King’s death, on the 2d of January 1716, the new ministry
issued an edict, which totally destroyed all. This was the most
extraordinary operation, I believe, ever invented; and to it was owing
the establishment of Mr. Law’s bank: I must therefore explain it.

There had been no general coinage since 1709; the louis d’or had then
been coined at 20 livres, and the crowns at 5, as has been said. The
edict of 2d January 1716, ordered a new general coinage, on the same
footing, both as to weight, fineness, and denomination, as that of 1709:
the only difference was, that the first had an old man’s head upon it;
the other had that of a child of six years old.

By this first operation, there was an end put to the former diminutions
on the denomination of the coin; which was now raised again to 40 livres
the marc, as in 1709[14]. This is nothing:

Footnote 14:

  Here is also an operation upon debts. The day before this edict, that
  is, the 1st of January 1716, the value of the King’s debts was (as has
  been said) above 142 millions sterling: but an edict comes, raising
  the coin to 40 livres _per_ marc; and consequently, reducing the debts
  to the value of 100 millions sterling.

There being no difference between the old coin and the new, except the
stamp, the old coin was called in, and a new face was stamped on the
very same pieces. But when the louis d’ors were called in, they were
received at the mint at no more than 16 livres; and by a stroke of the
wheel, they were, in an instant, converted into 20 livres, the
denomination of the new coin.

Thus a person who brought 20 old louis d’ors to the mint, received back
16 of his own 20, new stamped, and no injustice was said to be done,
from this demonstration of ministerial algebra, viz. 16 × 20 = 20 × 16.
Can any thing be more clear and instructive! Some of my readers may not
give credit to this; but it is true nevertheless.

Under these circumstances, it was natural for the inhabitants to wish to
dispose of their old coin, at any other market than at the King’s mint.
They did what they could to smuggle it to Holland; where the industrious
Dutchman stamped a 16 livre piece with the head of a child, as well as
the King of France could do, and sent it back to France for a 20 livre
piece. These operations were prevented as well as government could; and
every method was tried to force in the old coin to the mint.

Mr. Law judged this a very proper occasion to form the plan of a bank of
circulation, upon the principles we have already explained.

He gave in his scheme to the Duke of Orleans; by whom it was approved
of; and the bank was established the 2d of May of the same year 1716.

The first thing Mr. Law did, was to buy up with bank notes this old
coin, at a price above what the mint gave, but many _per cent._ below
the proportion of its value: his paper (payable in the new coin at 40
livres _per_ marc) was run upon for this, as well as other reasons; and
an immense profit ensued.

This anecdote, I think, is curious, and tends to unfold Mr. Law’s
combinations, in the proposal he made to the Duke of Orleans for
erecting a bank at this period of time.


------------------------------------------------------------------------


                               CHAP. 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 2d 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[15].

Footnote 15:

  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.

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, rendring 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 no body seemed dissatisfied: the nation was rather pleased:
so familiar were the variations of the coin in those days, that no body
ever considered any thing 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 that of Mr. Law; 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.

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[16].

Footnote 16:

  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 liberate himself, and to make over to his
  subjects, for more than fifty-two millions of taxes, which had been
  imposed in the years preceeding 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 antient 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: every thing was
  commendable, and worthy of admiration.” These are the sentiments of
  Dutot, concerning this system of paper credit.

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 inanition, 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 burst, than the whole nation
was thrown into astonishment and consternation. No body 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 writ 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 downfal.

This, if we judge by what has been writ, 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.


------------------------------------------------------------------------


                              CHAP. 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 that 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; 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 rendred 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[17]. 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 is always
good, providing 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.

Footnote 17:

  It is astonishing to find how gravely Messrs. de Melon and Dutot
  reasoned concerning the nature of paper money, and the effects of
  changing the value of the coin. They both seemed to agree that a livre
  was a livre whether it was the 28th or the 50th part of a marc of
  silver, whether it was a denomination upon paper, well or ill secured,
  no matter which.

  The whole reasoning turned merely on the question, who were robbed,
  and who fantastically enriched by such absurd operations upon the coin
  of a country?

  The jargon of such men certainly contributed a great deal to darken
  the understandings of the ministry at this time; and to make them
  believe that the affairs of money were infinitely more obscure and
  more difficult to be understood than they really are.

  There are thousands of examples where mankind, with their learning and
  reasoning, have turned common sense into inextricable science; this I
  think is a famous instance of it: and it is rendring no small service
  to the world, to destroy, in a manner, what others have been at so
  much pains to establish. This is restoring common sense to its native
  dress, in which it becomes intelligible to every one.

  I know very well that the ministry of France have now very different
  notions concerning paper credit; but these notions have not as yet
  reached the press, except in some of the King’s answers to the
  remonstrances of the parliament of Paris in 1760. These answers were
  dictated upon sound principles, and do great honour to the ministry.

  The old notions still prevailed in the remonstrances of the
  parliament. This plainly appears from the proposal they made to the
  King, at that time, to issue paper to the amount of 200 millions,
  which the parliament was to make good. An expedient to avoid doing
  that which right reason demanded of them, viz. first to secure a fund
  for the paper, and then to borrow upon that fund. This proposal from
  the parliament, and the King’s rejecting it, proves that credit was
  then better understood in the cabinet than in the _palais_.

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, providing 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 in time coming. 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 æra and beginning of all the confusion. From this loan
proceeded the downfal of the whole system.

But before I proceed to explain the scheme of the Regent in these
operations upon credit, I think it will contribute to the clearing up of
the subject in general, to premise some short account of the rise and
progress of this great company of the Indies: and to give a short
abstract of some of the most memorable transactions during the
Missisippi scheme, in the order of time in which they followed one
another.


------------------------------------------------------------------------


                              CHAP. XXVII.
         _A short Account of the French Company of the Indies._


Cardinal de Richlieu, that great minister to Louis XIII. was the first
who established trading companies in France, anno 1628, about the time
of the siege of Rochelle.

He then set on foot the companies of the West and East Indies.

Several others, viz. one for Canada, one for the Leeward Islands, and
another for Cayenne, were successively established in the beginning of
the reign of Louis XIV.

These companies, before 1664, had frequently changed their forms, and
had succeeded very ill.

At that time the great Colbert was in the administration of the King’s
affairs. He engaged his master to think seriously of establishing the
trade of his kingdom upon solid principles; for which reason all the
undertakers of the former projects of commerce to the new world were
reimbursed; and a new establishment was made, called the _Compagnie des
Indes Occidentales_.

This exclusive trade comprehended that of Canada, the Caribbee Islands,
Acady, Newfoundland, Cayenne, the French continent of America, from the
river of the Amazons to that of Oronoko, the coasts of Senegal, Goree,
and other places in Africa; the whole for 40 years.

The same year, 1664, there was another company formed for the East
Indies, of which we shall speak afterwards.

The greatest encouragement was given to these new establishments. Large
sums were advanced by the King for several years, without interest, and
upon condition, that if, at the end of that term, any loss was found on
the trade, it should fall upon the money due to the King.

On examining into the West India company’s affairs, after ten years
administration, that is to say, in the year 1674, it was found, that
instead of profiting of their extensive privilege, by carrying on a
regular trade themselves, they had sold permissions to private people to
trade with them.

This abuse in the company had, however, inspired a taste for trade among
the French; which the King wishing to improve, he reimbursed to the
company all their expences, added their possessions to his domain, and
threw the trade open to his subjects.

Thus ended the first company of the West Indies, called by the French,
the _Compagnie d’Occident_.

After the suppression of this company, the French trade to America was
carried on and improved by private adventurers, some of which obtained
particular grants, to enable them to form colonies. Of this number was
Robert Chevalier de la Sale, a native of Rouen. It was he who first
discovered the river Missisippi, and who proposed to the King, in 1683,
to establish a colony there. He lost his life in the attempt.

Hiberville, a Canadian, took up the project; but soon died. He was
succeeded by Antony Crozat, in 1712, who had better success; but the
death of the King in 1715, and the rising genius of Mr. Law, engaged the
Regent of France to make Crozat renounce his exclusive privilege of
trading. Upon which, by edict of the 6th of September 1717, was formed
the second _Compagnie d’Occident_, in favour of Mr. Law: to which was
added the fur trade of Canada, then in the hands of private adventurers,
and the farm of the tobacco, for which he paid 1,500,000 livres a year.

I now come to the East India company.

I have already mentioned the establishment of it by the great Colbert in
1664.

After his death, want of experience in those who succeeded him, abuse of
administration, carelesness in those who carried on the company’s
business, competition between different companies, and, in short, every
obstacle to new establishments, concurred with the consequences of the
long and expensive wars of Louis XIV. to render all commercial projects
ineffectual; and all the expence bestowed in establishing those
companies was in a manner lost.

In 1710, the merchants of St. Malo undertook the East India company. It
languished in their hands until 1719, and their importations were not
sufficient to supply the demand of France for India goods: for this
reason it was taken from them, and incorporated with Mr. Law’s company
of the West Indies, in May 1719.

By this incorporation was established the great _Company of the Indies_,
which still subsists in France: the only monument extant of the famous
and unfortunate Law.

For the better understanding, therefore, what is to follow, let us
attend to some historical and chronological anecdotes, relative to the
wonderful operations of this Missisippi bank, and company of the Indies.
These I shall set down according to the order of time in which they
happened, that my reader may have recourse to them as he goes along.

Without the help of this table, I should be involved in a history of
those events, which however amusing it might be to some readers, would
be quite inconsistent with the nature of this inquiry.


------------------------------------------------------------------------


                             CHAP. XXVIII.
                       _Chronological Anecdotes._

[Sidenote: 1709.]

A general coinage in France: the marc of standard silver, worth two
pounds sterling, put at 40 livres denomination.

September 1713. The late King reduces the denomination of the silver
coin to 28 livres the marc, and the gold in proportion.

These reductions were made gradual and progressive, and were finally to
take place no sooner than the 2d of September 1715.

August 1715. The King declares, that in time coming, the coin was to
remain stable at 28 livres the marc of fine silver.

September 1715. The King dies.

January 2, 1716. The Regent of France orders a new general coinage:
raises the silver coin to 40 livres the marc, and calls down the old
King’s coin (though of the same weight, fineness, and denomination) 20
_per cent._

May 1716. Mr. Law’s bank established: bank notes coined; and the old
coin bought up at great discount.

September 6, 1717. Mr. Law’s company of the West established.

September 4, 1718. He undertakes the farm of tobacco.

September 22, 1718. The first creation of actions of the company of the
West to the number of 200,000, subscribed for in state billets, at the
rate of 500 livres _per_ action.

January 1, 1719. The bank taken from Law, and vested in the King. At
this time the number of bank notes coined amounted to 59 millions of
livres.

April 22, 1719. A new coinage of 51 millions of notes; in which the
tenure of the note was changed, and the paper declared _monnoie fixe_.

May 1719. Mr. Law’s company of the West incorporated with the company of
the East Indies; after which it was called the _Company of the Indies_.

June 1719. Created 50,000 new actions of the incorporated company; sold
for coin at 550 livres _per_ action.

June 10, 1719. Coined of bank notes for 50 millions of livres.

June 1719. The mint made over to the company for 50 millions.

July 1719. Created 50,000 actions as above, sold, for notes, at 1000
livres _per_ action.

July 25, 1719. Coined of bank notes for 240 millions.

August 1719. The company obtains the general farms: promises a dividend
upon every action of 200 livres: agree to lend the King sixteen hundred
millions at 3 _per cent._ and have transferred to them 48 millions _per
annum_ for the interest of that sum.

September 12, 1719. Coined of bank notes for 120 millions.

September 13, 1719. Created no less than 100,000 actions; price fixed at
5000 livres _per_ action.

September 28, 1719. Created 100,000 more actions, price as the former,
fixed at 5000 livres each.

October 2, 1719. Created 100,000 more actions, price as the former, at
5000 livres each.

October 4, 1719. Coined by the Regent’s private order, not delivered to
the company, 24,000 more actions, which compleated the number of 624,000
actions; beyond which they never extended.

    October 24, 1719. Coined of bank notes for          120 millions.
    December 29, 1719. Coined of bank notes for         129 millions.
    January 1720. Coined of bank notes for               21 millions.
    February 1720. Coined of bank notes for             279 millions.

February 22, 1720. Incorporation of the bank with the company of the
Indies.

February 27, 1720. A prohibition by which no one was to have in his
custody more than 500 livres of coin.

March 5, 1720. The coin raised to 80 livres _per_ marc.

March 11, 1720. The coin brought down to 65 livres _per_ marc; and gold
forbid to be coined at the mint, or used in commerce.

                                                          livres.
    March 1720. Coined of bank notes for                  191 803 060
    April 1720. Coined of bank notes for                  792 474 720
    May 1, 1720. Coined of bank notes for                 642 395 130

May 21, 1720. The denomination of the paper diminished by _arret_ of
council, which, in an instant, put an end to all credit, and made the
bubble burst.

At this period had been coined of bank notes to the immense

                                                          livres
   sum of                                               2 696 400 000
   Of which had been issued                             2 235 083 590
                                                        —————————————
   Remained in the bank                                   461 316 410

      Dutot, Vol. I. p. 144. Vol. II. p. 207.

May 27, 1720. The _arret_ of the 21st of this month recalled, and the
paper restored to its full denomination.

May 29, 1720. The coin raised to 82 livres 10 sols _per_ marc.

June 3, 1720. 400,000 actions belonging to the Regent are burnt; and the
24,000 more, which were created October 4, 1719, suppressed; also 25
millions of the interest formerly granted to the company for their loan
of 1600 millions, retroceded by the company, and constituted again upon
the town-house of Paris.

October 10, 1720. All bank notes are ordered, by _arret_ of this day, to
be suppressed, if not brought to the bank before the 1st of December
following, in order to be paid in manner therein specified.


------------------------------------------------------------------------


                              CHAP. 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.

So soon as the Regent of France perceived the wonderful effects produced
by Mr. 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 Mr. 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’etat_, 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 them 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 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 actions had produced no liquid value which
could be turned into trade (having been paid for in state billets) a new
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, 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’etat_ 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 combination which I am now
to unfold, must have, more or less, taken place between the Regent and
this great company.

The public was abundantly imbibed with the notion of the prodigious
profits of the company, before they got possession of the general farms.
No sooner had they got that 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 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 the new dividends.

But what could be the motive of the company to promise this dividend,
only three months 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 them to enter into an
examination of the wonderful phænomena 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
suspend a greater quantity of notes in circulation.

This was to be accomplished, 1. by the Regent’s purchasing the actions
himself from the company; 2. by borrowing back the notes he had paid for
them, in order to fill up the loan which the company had agreed to make;
3. to pay off all the public creditors with those notes so borrowed
back; and 4. when the nation was once filled with bank paper, to sell
the actions he had purchased from the company, to withdraw his own
paper, and then 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.


------------------------------------------------------------------------


                               CHAP. XXX.
_Inquiry into the Motives of the Duke of Orleans in concerting the Plan
                          of the Missisippi._


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 every one; and the King’s debts were to be reduced to 48
millions a year, instead of 80 millions.

That this is a supposeable 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 bare-faced, and
might have endangered the credit of the bank. Whereas in buying the
actions, which were run upon by every body, the state only appeared
desirous 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 manœuvre 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
talking, (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 only 400,000 actions created, rated at 777
millions: of these were 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 table, we perceive,
that after the actions were once carried to their full number, (October
4th, 1719) then the coining of bank notes began at a most prodigious
rate; in so much, that by the month of May 1720, they were increased
from 520 millions, to above 2696 millions; and 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 25 millions of interest upon the
sum of money due by the King to the company, 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 acknowleged publicly, that the notes were coined for
that purpose. (See Dutot, Vol. I. p. 144.) In the next place, it is
evident, that the notes which had been given in payment for those
actions, had been borrowed back, 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, in May
1720; and we shall see how they were paid and withdrawn in October
following.

This detail I own is 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 that 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 2d and 4th of October, to their full number, the
company, during that 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 expences of the state, and all
unnecessary charge was avoided in collecting and administring 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._ If that 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 the consequence of a
political combination.

But _if_ money, at that time, came to bear no more than 2 _per cent._
and if the company was able to afford 200 livres upon the action; where
was the inequity 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 vindicate the Regent from the gross imputation of
fraud, in the conduct of the Missisippi.

But what should still more exculpate that 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
for 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, _providing there was coin enough in
France_ for the changing of it, although that coin 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
Missisippi 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
day 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 admitting the contrary, would
be allowing them an infinite superiority of understanding over all the
rest of Europe.

Until the bubble burst, no body _could_ know where it was to end: every
thing appeared very extraordinary indeed; and the fatal catastrophe
might have been expected from the greatness of the undertaking, merely.
But if there had 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 that 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 forbid to have 500 livres in
coin in any person’s custody; consequently, it was also forbid 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; and no 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 that opinion I never can subscribe.

It may seem surprising that I should take so much pains to vindicate the
two principal conductors of that 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.


------------------------------------------------------------------------


                              CHAP. 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 22d 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 controller-general for the time
being, was to have, at all times, 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 no body minded gold or
silver any more than if the denomination in their paper had had no
relation to those 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, raising 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 33⅓ _per cent._ upon this operation. Did this hurt the
credit of the bank paper? Not in the least.

So 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 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 36th 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 22⁄27 are to 1; that is to say, that 207 livres 8 sols
1⅞ 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, 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 put under deliberation, before the famous
_arret_ of the 21st of May was given, viz. whether 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 that 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 proper, 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 concluded to reduce 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 prices were 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 22d 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 stretched 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’equité_” (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 writ 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 country, 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 writ a
book, which indeed few people can understand, in order to prove the
great hurt of tampering with the coin of France?


------------------------------------------------------------------------


                              CHAP. XXXII.
                 _Conclusion of the Missisippi 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.

That 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 2½
_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 farewel to credit and confidence; and to return
upon the old system of rents upon the town-house of Paris; and of coming
at money in the best way they could.

We shall now see how this was accomplished; and from that form a pretty
good guess at the extent of the fraud committed, with respect to the
creditors of France; not so much, I think, from any intrinsic defect in
the Missisippi scheme, as from the distress the nation was thrown into,
by the ignorance of those who over-ruled John Law in conducting it.

We have seen how the actions were reduced to the number of 200,000; we
must now give an account of the deplorable fate of the bank notes.

By the _arret_ of 10th of October 1720, all bank notes were entirely
suppressed; and it was declared, that after the 1st of December
following, they were to have no course whatsoever.

Here follows the arrangement of this great affair, viz. the liquidation
of 2 696 400 000 livres of bank notes as regulated by this _arret_.

 1_mo_, Of the above total of notes coined,         707 327 460 livres.
 there remained in the bank at that time, for
 2_do_, Subscribed for at 2½ _per cent._ in         530 000 000
 June 1720
 3_tio_, Carried to the bank by private people      200 000 000
 as a fund of credit there
 4_to_, Paid in coin by the bank                     90 000 000
                                                       ————————

This sum of notes was ordered to be burnt by the _arret_ of the 10th of
October.

The remainder still in the hands of the public, says the _arret_, was to
the amount of 1 169 720 540 livres, and the King declares, that the
holders of them might employ them as follows:

 1_mo_, In purchasing the remainder of the            470 000 000 livres.
 subscription of 25 millions of rents on the
 town-house of Paris, at 2½ _per cent. inde_
 2_do_, In purchasing a farther sum constituted        00 000 000
 on the town-house of Paris, of 8 millions of
 perpetual annuities, at the rate of 2 _per
 cent._ or at the 50th penny
 3_tio_, In purchasing a farther sum constituted      100 000 000
 on the town-house of Paris, of 8 millions of
 life-rent annuities, at 4 _per cent._ or at the
 25th penny
                                                     ————————————
   These sums amounted to                             970 000 000
   Sum above                                        1 527 327 460
                                                   ——————————————
   Together                                         2 497 327 460

There still remained outstanding about 200 millions of bank notes.

These were ordered to be disposed of in several different ways,
mentioned in the _arret_ of the 10th of October; which it would be
needless to mention, as it would require a long explanation to make the
thing understood: let it suffice that there was an outlet provided for
them, which brought in between 2 and 3 _per cent._

Thus we see the conclusion of the whole affair.

At the beginning, the King’s debts stood at 2000 millions capital, and
80 millions interest very ill paid.

 At the end of the scheme there had been coined of      2696 millions.
 notes about
 Of which in the bank, October 10, 1720     707  mil.
 And paid in coin                            90
                                             ——
 This substracted                                        797 millions.
                                                          ——
 There remained outstanding in bank                     1899 millions.
 notes[18]
 Add to this 100 millions still due by the King to       100 millions.
 the company for the _billets d’etat_ withdrawn in
 constituting the first 200,000 actions which still
 subsisted, and for which the company was to receive
 5 _per cent._
 So the capital of the King’s debts remained at         1999 millions.
 Balance gained by the whole operation                     1 million.
                                                          ——
 Consequently there was little or no fraud as to the    2000 millions.
 capital

Footnote 18:

  There are, however, in France at this day, many persons who are still
  in possession of large sums of those notes. This makes some people
  believe, that all the paper was called down without any equivalent
  given. The reason of those notes remaining, is, that either the
  proprietors neglected the occasion offered by the _arret_ of the 10th
  of October, or that they were in hopes that perhaps the bank might
  again recover its credit. They were mistaken, and the notes are lost.

Let us next examine the state of interest.

The interest at the last was,

    1_mo_, Of rents constituted in June 1720, on the
 town-house, at 2½ _per cent._ or at the 40th penny   25 millions.
    2_do_, Ditto of the 10th of October 1720, at 2
 _per cent._ or at the 50th penny                      8 millions.
    3_tio_, Ditto at ditto upon lives at 4 _per
 cent._ or at the 25th penny                           4 millions.
    4_to_, Due to the company upon the original
 stock of 100 millions still paid them at this day
 at 5 _per cent._                                      5 millions.
    5_to_, For the 200 millions of credit at the
 bank, suppose at the rate of 3 _per cent._            6 millions.
    6_to_, For the last 200 millions provided for in
 different ways, suppose at 2½ _per cent._             5 millions.
    7_to_, Allowed to the company to indemnify them
 for the loss they sustained by these arbitrary ways
 of reckoning with them, 80 millions at 5 _per
 cent._ still paid them                                4 millions.
                                                      ——
                                                      57 millions.
    The interest at first was                80 millions
    The interest at last was                 57 millions
                                             ——
    Defrauded by the scheme                  23 millions a year.

This is (as near as I can guess at it) the state of the French
bankruptcy in 1720.

The creditors were _robbed_ of 23 millions a year. I call it _robbed_,
because the interest due to them was diminished by that sum, without
their consent, and in consequence of the most arbitrary proceedings;
whereas, had the system been conducted with ability, the whole of the
debts would have been brought to an interest of 48 millions, instead of
57, and no body would have complained of injustice.

Money likewise might have been brought to 2 _per cent._ The 1600
millions borrowed of the company at 3 _per cent._ would then have been
reduced to two; which would have brought the 48 millions of interest,
upon the whole, to 32 millions: and France, from being reduced to
beggary by the King’s wars, would have become the most flourishing state
in Europe.

Let us next guess at what may reasonably be supposed to have been the
largest sum of coin ever collected in this bank.

I imagine that the far greater part of all the coin supposed to be in
France during the Missisippi scheme, remained in private hands, without
ever coming into the bank. My reason for being of this opinion is,

Law never could have had more than the value of his original stock, and
all the value of notes he had in circulation.

It is absurd to imagine he ever should have had the half, or near it;
but let me suppose it,

   The bank stock was                                    6 millions.
   The notes he issued were                             59 millions.
                                                        ——
      In all                                            65 millions.

This is a trifle compared with 1200 millions.

Next for the united bank. The time at which the greatest quantity of
coin was collected, must have been when all credit failed, that is, on
the 21st of May 1720.

At that time coin was taken out of commerce: every one was forbid to
have above 500 livres in possession; and every operation had been used
to call it in.

At this time, we know that all the notes coined were issued, except to
the value of 461 316 410 livres.

Now we have seen that on the 10th of October following, there were in
the bank to the value of 707 327 460 livres.

Let me, therefore, suppose, that from the 21st of May to the 10th of
October, the bank paid away in coin, the difference between these

 two sums; to wit,                                 246 011 050 livres.
 Add to that sum what was then in the bank, viz.    90 000 000
                                                     —————————
 Sum                                               336 011 050

This sum is all we possibly can suppose to have been in the bank on the
21st of May, when credit failed.

We must reckon this sum of coin at 82 livres 10 sols _per_ marc, the
then value; which makes about 8 146 600_l._ sterling. A large sum, no
doubt; but little more than ⅕ of 40 millions sterling, the value of 1200
millions of livres, at 60 to the marc, as has been said. Consequently,
either those 40 millions sterling were not then in France, or the
greatest part of the sum had remained in private hands during this whole
operation.

In this light I see the Missisippi 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 so much facts 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.


------------------------------------------------------------------------


                             CHAP. 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
preceeding 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 day following?

If there was a value, said they, what is become of it? If there never
was any value, how could a nation be so deceived? This phænomenon 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 rendred precarious, by a blundering administration: then credit
failed, 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, raised so high by
the low rate of interest, might have been preserved: consequently that
value, in capital, _really existed_ relatively to the rate of interest.

As the object of the present disquisition into the principles upon which
the Missisippi scheme was conducted, is only intended as an illustration
of the principles of credit in general; I shall first account for the
wonderful phænomenon 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 phænomenon 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.

1_mo_, 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.

2_do_, These debts were 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.

3_tio_, 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, a 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, administred 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, less or
more, 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 were
in use 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.

4_to_, 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
Missisippi, 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 phænomenon.

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. No body 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 11½ _per cent._ only.

Now the rate of this subscription was at 2½ _per cent._ as we have seen;
consequently, if 100 livres of notes lost but 11½ _per cent._ they were
worth 88½ livres in coin; but these 100 livres in notes were worth 2½
_per cent._ because the subscription was open at that rate: consequently
88½ 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 would, 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 would have set before the public a full and exact account of the
company’s funds. I would have banished all mystery from the affairs of
credit. I would have registred a declaration in parliament, setting
forth,

1_mo_, That all future changes either upon the denominations of paper or
coin, were contrary to the maxims of good government.

2_do_, That all stipulations between the King and his creditors were to
be inviolable. And,

3_tio_, That the parliament of Paris should for ever remain invested
with an exclusive right to watch over those regulations in time to come;
and I would have bound the parliament by a special oath for that
purpose. I would 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, 1.
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: 2.
That money would have come back to 2 _per cent._ and then, 3. Had banks
been established upon a proper plan, ease, with industry, would long ere
now have appeared in every corner of that kingdom.

How infinitely 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. 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 the proper place.


------------------------------------------------------------------------


                              CHAP. XXXIV.
 _How the diminishing the Denomination of the Paper in Circulation, by
the arret of the 21st of May 1720, destroyed the Credit of France, when
the same arbitrary Measures taken, with regard to the Coin, had produced
                            no such Effect._


This question is curious, and I shall endeavour to resolve it in the
best way I can, before I conclude this subject.

The first thing to be done is to point out the immediate effects which
resulted upon diminishing the denomination of the paper; because the
destruction of the credit of France was not the immediate consequence of
this _arret_; but the ultimate effect of a chain of consequences which
followed indeed very quick upon one another.

The paper had been declared, against the opinion of Mr. Law, by an
_Arret de Conseil_ of the 22d of April 1719, _une monnoie fixe_, as has
been said. Consequently, any diminution of its denomination was a plain
infraction of the public faith. From this declaration in the _arret_ of
the 22d of April 1719, the public reaped one notable advantage, which
was, that in borrowing and lending paper, every one was sure that the
obligations contracted could be dissolved by restoring the very same
species of property which had been received; but by diminishing the
denomination of it, by the _arret_ of the 21st of May 1720, all such as
were debtors, became obliged to discharge their debts at the expence of
double the sum of paper borrowed.

The immediate consequence, therefore, of touching the denomination of
the paper, was, to shew the public that their fortunes in paper were
liable to the same inconveniences as fortunes in specie; that is, that
they might be increased or diminished at pleasure. Upon this it was very
natural for every one to endeavour to realize his paper, and put it into
coin: since, _in pari casu_, it was better to have it in that which had
some intrinsic value, than in that which had none at all.

Of all the French paper, the notes were the most easily realized;
because there was contained in them a direct obligation upon the bank to
pay them in coin. The actions again were more difficult to be converted;
because in order to realize them, it was necessary to find people who
were willing to give either notes or coin for them.

A run upon the bank, therefore, taking place, upon the _arret_ of the
21st of May, it was obliged to stop payment: this occasioned a general
alarm, and _destroyed the confidence which the public had had in the
state_, which is what we mean by _public credit_.

This point explained, it remains to shew why the augmentations and
diminutions upon the specie should not have ruined the credit of the
paper.

1_mo_, The operations upon the specie affected the paper only
indirectly; but the diminution upon the paper affected it directly.

The operations upon the specie only affected that part of the paper
which was made to circulate as an equivalent for the specie; or in other
words, that part which people realized, either, 1. with an intention to
withdraw their funds altogether out of the scheme; or 2. to profit of
the operations upon the specie; or in the last place, to procure small
sums of money for common expences.

Now as to the first, the number of those who wished to withdraw their
stocks were inconsiderable, in proportion to the stock-jobbers; and
therefore their interest could not affect the general credit; and the
last was inconsiderable in every respect.

As to the second, the government made it very difficult for the
proprietors of notes to profit of the operations upon the coin. When it
was to be diminished, the diminutions were advertised some time before
they took place, and the diminution went on always by degrees. Thus
people who had paper, with which they could trade in buying actions,
constantly rising in their value, by the intrigues of the state, when at
the same time the denominations of the coin were diminishing, did not
carry their notes to the bank for two reasons.

The first, that the paper really gained by every diminution upon the
denomination of the specie, in an exact proportion to the diminution. A
livre in a bank note, while the specie was diminishing by intervals from
80 livres the marc to 65 the marc, gained regularly in the hands of the
possessor; whereas had he realized at any period but the last, the
subsequent diminutions upon the specie he had acquired with his paper
would have affected the value of it.

The second was, that by realizing he deprived himself of the profit of
stock-jobbing.

The only way, therefore, for the proprietors of the paper to gain by the
operations of the state upon the coin, was to guess the time when the
coin was to be raised in its value: but this was impossible; for the
rising was sudden and unexpected; whereas notice was constantly given of
the fall, at some distance of time.

For example, the money was suddenly raised the 5th of March 1720, from
60 livres to 80 livres the marc; and the 11th of the same month, notice
was given, that on the 1st of April following, it was to be brought down
again to 70 livres _per_ marc; and on the first of May following, to 65
livres. The consequence of this was, that from the 11th of March, people
were glad to carry money to the bank for notes, which were to stand at
the same denomination, whereas the silver was to diminish on the 1st of
April.

Accordingly a great sum, above 44 millions, was brought in during this
interval.

When the 1st of April came, and that the silver was brought to 70 livres
the marc, those who were in possession of the paper, were still
prevented from realizing; because of the future diminution which was to
take place. When this term was come, people had reason to imagine that
the silver would for some time stand at 65 livres the marc;
consequently, there was more to be gained in stock-jobbing with the
notes, than in realizing them in specie, which, in order to make profit
of it, must have lain dead until a new augmentation; which was a very
uncertain event. In short, there was no run upon the bank from the 1st
to the 21st of the month of May, when the famous _arret_ in question was
given. Then indeed the run came on with violence, and payment was stopt.

2_do_, The second reason why the effects were different when the state
changed the denomination of the coin, from what they proved to be when
the denomination of the paper was changed, I take to be this,

That in France the operations upon the coin had been familiar; and were
expected by every body: and, perhaps, the very making the paper a
_monnoie fixe_, had for this reason added to the credit of it. A most
surprizing thing! The state took care always to gain, whether they
raised, or whether they diminished the value of the coin. The
stock-jobbers, therefore, never minded the coin at all. If they could
profit by an augmentation by foreseeing it, they realized; if they could
see a diminution before notice was given of it, then they bought paper.

The operations on the coin principally affected such as were either
respectively debtors or creditors, to people who were obliged to pay, or
to receive their debts in specie; or who had a fixed revenue specified
in a number of livres. There the disorder was great, as has been
frequently observed.

3_tio_, The operations upon the specie never could destroy the intrinsic
value of it, however they might prevent the circulation of it for a
fixed legal denomination; therefore it remained under all combinations
of circumstances, a thing valuable to be acquired; and it still remained
a commodity, desireable by all, and was therefore constantly demanded.

But a discredit cast upon the paper had a different effect. The value
_there_ depended entirely upon the will of the state, and every body saw
that it was as easy to annihilate it, as to reduce it to one half. The
discredit, therefore, had the effect of stopping _the demand for it_,
that is, the currency; consequently, a run upon the bank immediately
took place.

4_to_, The rendring the value of the paper precarious, made every
possessor of it seek to realize it without delay. The proprietors of the
bank notes ran to the bank; and a run upon the bank, at a time when it
could offer payment for the notes in no other value than actions, was a
declaration of bankruptcy. Now it was the run upon the bank; it was this
claim which the subjects had a right to make upon the bank, for which
the King was guarantee, which destroyed the credit of France; and it is
very evident that no operation upon the specie could possibly produce
any such effect[19].

Footnote 19:

  It was a capital mistake in this diminution upon the paper to make it
  gradual. Was it not evident that every mortal would seek to realize a
  note which was to diminish in its value progressively every month? A
  note worth 10,000 livres, for example, the 22d of May, was immediately
  reduced to 8000 livres, and the 1st of July, was to be worth only
  7500. This was plainly solliciting a run upon the bank. The stroke
  should have been struck at once.

In short, had this operation upon the paper been suspended for a few
months; had the people of France been indulged in a little more time,
their infatuation in favour of the actions would have carried them to
employ all their bank notes in the purchase of those which remained in
the hands of the state. By this operation the far greater part of the
notes might have been withdrawn and destroyed, and when the bank found
themselves in a situation to answer the call of all those which
afterwards remained in circulation, then the state might have boldly
ventured to diminish the price of actions: because if that stop had
occasioned a run upon the bank for the outstanding notes, there would
have been coin enough to answer them at their full value; and this would
have confirmed the credit of the bank more than any thing.


------------------------------------------------------------------------


                              CHAP. XXXV.
  _How a Bank may be safely established in France, as Matters stand at
                               present._


The prerogative of the Kings of France is limited by no written law,
because he is acknowledged to be the legislature of his kingdom; and the
exercise of his power is only limited by maxims of state. The first of
which is, that he is to govern according to his laws, and not according
to his ambulatory will.

Now, in making of laws, the parliament have a sort of negative, _de
facto_; because the whole regular and legal execution of every law is
committed to them: and if they refuse to register it, they refuse to
execute it; and a law without _execution_ is, in fact, no law at all.

When the King’s will can be carried into execution by a single act of
power, the authority of parliament is of no effect in preventing it.
When this requires a train of systematical administrations, the
concurrence of parliament, who hold the whole regular execution of the
laws, is absolutely necessary.

Banks of deposit and of circulation, stand, it must be confessed, upon a
very precarious footing, under such a government.

An order from the King is at any time sufficient to command any deposit
of specie which can be made within the kingdom. While this is the case,
no paper can have any solidity, which draws its security from such
deposit.

Coin, therefore, must be banished from all banks in France: and the use
of them should be entirely limited to that of an office, for the keeping
of reckonings between people who have solid property, and who may want,
on a thousand occasions, to melt it down in favour of consumption,
trade, industry, agriculture, or the like.

In this light, a general bank may be established at Paris; and branched
out over the whole kingdom. The stock of it should consist in land
property, engaged unalienably, to make good the engagements of the bank.

Notes should be issued upon solid security, bearing no interest while
they circulate as money; and when they return upon the bank, either the
original securities may be withdrawn, or payments might be made by the
transfer of a corresponding perpetual interest.

Every province, every considerable city in the kingdom, should be
allowed to be interested in such a bank: and in every considerable city,
there should be an office for transacting such credits, and for
regularly receiving all payments of interest. If the King should think
fit to allow his mint to supply coin, or bullion, for bank notes
presented, at a determinate premium, he might by this operation advance
the commercial interests of his kingdom, in facilitating the payments of
a wrong balance of foreign commerce: but without that regulation, the
bank will be perfectly sufficient for promoting and supporting domestic
circulation. Every one who is able to give security for a certain
interest, will be sure to find money: and as the expence of conducting
such a bank will be very small, the interest for money will be very low.

As I said before, a bank of this kind would be no more than an office,
appointed for keeping accounts between people who are possessed of any
paper secured upon real and solid property: and farther, in the
beginning, at least, I would not advise to carry it.

The general accompt of the bank would appear in a few articles, viz.
Credits given, so much; _inde_ of interest to be received, so much.

Notes returned, so much; _inde_ of interest to be paid, so much; balance
in favour of the bank, so much.

A bank of this nature would answer every purpose for promoting industry
and domestic circulation.

Such a bank must neither issue, or ever receive coin in payment.


------------------------------------------------------------------------


                              CHAP. XXXVI.
                  _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
particular combinations of 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.

1_mo_, 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.

2_do_, 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 taken for the value.

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


------------------------------------------------------------------------


                             CHAP. XXXVII.
                      _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 _Essay 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 writ 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 that to be
shut up in the bank, and were the credits written in the books of the
bank to exceed that 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 only in transfer. 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.


------------------------------------------------------------------------


                             CHAP. XXXVIII.
                _Of the Agio of the Bank of Amsterdam._


We have pointed out one motive for establishing a bank of deposit at
Amsterdam, viz. that of fixing the residence of trading men in that
city.

Another was, to prevent the inconveniencies to which a small state was
exposed, by the introduction of bad coin, from all the neighbouring
countries in Europe, with whom they traded.

In the territory of Holland there are no mines of gold and silver;
consequently all they have comes from other countries, as the return of
a favourable balance upon their commerce.

At the time the bank was established, the republic was in a state of
infancy; and any coin they had, was that of their old masters the
Spaniards. This was unequally coined; many pieces were light; many had
been clipped and washed. As they extended their traffic, they were
obliged to receive great quantities from Germany, which was still worse.

In order then to prevent the circulation of such coin, and the
perplexities occasioned by it in all accounts, they established a bank,
and fixed the standard upon a silver coin called the ducatoon, to which
they gave the denomination of 3 florins or guilders bank money.

But as this coin also was unequal, like all the rest of the specie in
Europe, before the introduction of milled coin, and the policy of
weighing piece by piece at the mint, the bank appointed the ducatoons to
be received in bags of 200 pieces, weighing together 26 marcs 5 ounces
10 engles of Amsterdam troes, or gold weight; which being reduced to
aces, (the lowest denomination in this weight) make 136,640 aces. This
divided by 200, gives, for the weight of 1 ducatoon, 683.2 aces.

Let us now convert these aces into troy grains, according to the
proportion established between Dutch aces and troy grains, in the last
chapter of the third book.

The equation will stand thus,

5192.8 aces, being equal to 3840 troy-grains, 683.2 aces, therefore,
will equal 505.21 troy-grains; which, consequently, is the weight of a
ducatoon, or of 3 florins bank money of Amsterdam.

Next as to the fineness of this coin:

The ducatoon was coined, according to the imperial standard, of 14 loots
16 grains fine: that is to say, it is 268⁄288 parts fine, and 20⁄288
parts alloy.

To find, therefore, the number of Hollands aces, and of troy grains of
fine silver in the ducatoon, state the two following proportions:

             288 : 268 :: 683.25 : 635.75 aces fine.
             288 : 268 :: 505.21 : 470.13 troy-grains fine.

In the last place, if we divide the number of aces, and troy grains fine
in the ducatoon, by 3, we shall see the exact weight of fine silver in 1
florin of Amsterdam bank money.

    635.75⁄3 = 211.91 aces, and 470.13⁄3 = 156.71 troy-grains fine.

These calculations premised, it would be an easy thing to fix the exact
par of the metals, between sterling and bank money of Amsterdam, were
the British coin of legal weight, and were the metals there rightly
proportioned. But is it to be supposed, that any person who has bank
money of Amsterdam, would exchange, at the par of the metals, with
sterling silver, which is many _per cent._ too light, or against English
bank notes paid in gold, always overrated with regard to the silver, and
often too light also?

While, therefore, the coin of Great Britain stands upon the present
footing, all calculations of the par of exchange, as it is commonly
computed, upon the intrinsic value of the coins of other nations, must
be delusive and of no utility whatever.

For the sake of giving an example, however, here is the real par of the
two currencies, upon silver sterling coin of full weight.

One pound sterling should contain, as has been said, of fine silver
1718.7 troy grains, and contains 240 pence sterling: state, therefore,
the following proportion, and you will find how many pence sterling one
florin of Amsterdam banco should be worth.

                    1718.7 : 240 :: 156.71 : 21.883.

Thus 21.883 pence sterling is exactly the real par of an Amsterdam
florin banco, supposing sterling money to be silver, at the full weight.

The florin bank money being regulated upon the ducatoon, an old species
not now coined, the fineness of the silver was determined; and the
weight of the 200 ducatoons being determined also, this regulation
determined the weight of single pieces, and fixed the standard of the
florin banco, in weight and fineness.

The current money in Holland, coined by the state, is the florin of
200.21 aces fine, as we have seen in the last chapter of the preceding
book.

So soon as the state coined their current florins at 200.21 aces, it is
evident, that the ducatoon, which contains three times 211.91 aces, must
rise in its value. Accordingly, the piece which was in bank money, 3
florins, became 3 florins 3 stivers current money.

This difference is what is called the agio of the bank of Amsterdam.

From this it appears, that the advanced value of the bank money above
the current money of Holland, is not owing to the great credit of the
bank, as some imagine, but to the superior intrinsic value of the coin
upon which the standard of the bank money is fixed.

Let us next determine the exact difference between the bank and the
current money, which difference I shall call the _intrinsic agio_: for
this purpose state this proportion;

                    200.21 : 211.91 :: 100 : 105.84

From which it appears, that the bank money is 5.84 _per cent._
intrinsically better than the current money of Holland.

We have seen in the chapter referred to, in what a confused state the
Dutch coin is at present, and how it becomes a science to comprehend any
thing concerning it. For this reason it is, that the regular agio of the
bank money of Amsterdam is always supposed to be 5 _per cent._ Farther,

The ducatoon, upon which it is regulated, passes for 3 florins 3
stivers, which is just 5 _per cent._ better than 3 florins, at which it
was rated when the bank was established; but most of the coins which
circulate are light.

Those who conduct the affairs of the bank, have now lost sight of this
original coin, which is rarely found circulating, in considerable sums;
and they consider the florin according to its intrinsic worth of 211.91
aces of fine silver; and as the value of silver varies, they publish
regulations for receiving coin, such as Spanish dollars, French crowns,
&c. according as they find the proportion of their worth in bank money:
and compounding the value of gold with the value of silver, they make
the same regulations as to gold.

I have insisted too long already upon the subtilties of the variations
in the proportion between gold and silver, to take it up again in this
place. My intention is to explain the principles upon which this great
bank of deposit is established, and not to descend into a detail of the
mechanism of their adapting the variable coins of Europe to their own
standard.

I have said, that the sum of credit, written in the books of the bank,
is in proportion to the quantity of bank money necessary for circulating
the trade of Amsterdam.

Consequently, as this circulation increases, the demand for bank money
increases also.

Again; in proportion as the demand for bank money increases, the agio
rises; and on the other hand, as the demand for current money increases,
the agio falls.

Thus we saw in the last war, _ann._ 1760, 1761, 1762, that agio was
below 5 _per cent._ The reason was plain. The great circulation carried
on in Amsterdam was considerably directed towards the uses of the war.
_There_ bank money was of no use; coin only could serve the purpose.
Accordingly agio fell to —— _per cent._ and as gold was much more easily
transported than silver, that metal rose ¼ _per cent._ above the
ordinary proportion of 1 to 14½.

Demand regulates every thing; and this demand makes the agio fluctuate;
sometimes rising above, and sometimes falling bellow 5 _per cent._


------------------------------------------------------------------------


                              CHAP. XXXIX.
  _Continuation of the same Subject; and concerning the Circulation of
                  Coin through the Bank of Amsterdam._


Hitherto we have represented this bank as a gulf, which is calculated to
swallow up the coin of Europe; without having pointed out any faculty of
throwing up a part of the treasure so secured, in case of an overcharge.

This has appeared a mystery to many, and a defect in the constitution of
the bank.

But when the principles upon which it is established come to be compared
with some branches of their administration, which are publicly known,
perhaps the mysterious part may be unravelled. And although I do not
pretend to give an entire satisfaction as to every minute particular, I
think I can shew how, and to what extent, the treasure may circulate, so
as to occasion no abuse, either from the hoarding it on one hand, or
from the dissipation of it, for the service of the state, on the other:
and if all these conjectures shall be found to hang together, and appear
consistent with principles, without being contradicted by any known
fact, then I may conclude, that such a system of banking as I describe,
is at least a possible supposition, whether it exactly coincides with
that of Amsterdam, or not. And who knows but my speculations may enable
some person of more knowlege and more sagacity than I am possessed of,
to render this curious operation of credit still more generally
understood than hitherto it has been.

I have shewn how the agio rises and falls, according to the demand for
bank money.

So long, therefore, as the agio does not fall below the difference
between the value of the two currencies, it is a proof that all the
credit writ in the books of the bank does not exceed the uses for it:
consequently, the coin locked up, which never can exceed the credit on
the transfer books, and which, were it not locked up, could be of no
more service than the credit itself, in circulating the trade of
Amsterdam, does not exceed its due proportion: consequently, it is not
hurtfully withdrawn from commerce; consequently, no abuse is implied
from the hoarding of it.

But let me suppose a case, which may happen; to wit, that for a certain
time, the trade of Amsterdam may demand a larger supply of credit in
bank, than is necessary upon an average. Will not this raise the agio?
No doubt. If the agio rises so high as to afford a premium upon carrying
coin to the bank, upon the footing of their own regulations, this will
augment the sum of bank credit; because the money so carried to the
bank, becomes incorporated with the bank stock; the value is writ in the
books of the bank; and when this is done, the coin is locked up for
ever.

If then it should happen, that the trade of Amsterdam should afterwards
diminish, so as to return to the ordinary standard, will not this
overcharge of credit depress the rate of bank money, and sink the agio
too much below the par of the intrinsic value of the two currencies?

To these difficulties I answer, like one who, being ignorant of facts,
which I never could get ascertained by any person in Holland to whom I
had access for information, and which remained hid from most people in
the deep arcana of Amsterdam politics, must have recourse to
conjectures, founded upon natural sagacity.

First then, The city of Amsterdam knows, from long experience, the rate
of demand for bank money; and it is not to be supposed, that upon any
sudden emergency, which may _heighten_ that demand for a time, they
should be such novices as to increase the credit upon their books so
far, as to run any risk of overstocking the market with it; especially
as, on such occasions, the deficiency of bank credit might be supplied
with coin, constantly to be found in the city of Amsterdam, as we shall
explain presently.

Farther, Who will say, that there does not reside a power in the
managers of this bank, to issue coin for the superfluous credit, in case
that, in spite of all precautions to prevent it, a redundancy of bank
credit should at any time be found upon their books?

It is very true, that no person, having credit in bank, can demand coin
for such credit; and as no demand of that sort can ever be made, it is
very natural to suppose, that a redundancy of coin and credit can never
be purged off.

During my stay in Holland, I was at great pains, to no purpose, to
discover whether ever the bank issued any part of their credit cash upon
any such occasions. Every one I conversed with was of opinion, that if
ever any coin had been taken from the treasure of the bank, it must have
been by authority of the states, for national purposes: a step conducted
with the greatest secrecy; and the matter of fact, I found, was
extremely doubtful. But this is nothing to the present purpose. That the
coin may be disposed of, I allow, though I do not believe it; but how is
the superfluous credit, writ in the books, to be disposed of? There lies
the difficulty.

The popular opinion is, that coin has been taken out for the service of
the state: the opinion of many intelligent men is quite contrary.

I am now to give my opinion, not only as to this point, but upon the
main question; and this not from information, but from conjecture; which
I shall humbly submit to the better judgment of my reader.

My opinion then is, 1_mo_, That every shilling written in the books of
the bank, is actually locked up, in coin, in the bank repositories.

2_do_, That although, by the regulations of the bank, no coin can be
issued to any person who demands it in consequence of his credit in
bank; yet I have not the least doubt, but _that both the credit written
in the books of the bank, and the cash in their repositories which
balances it, may suffer alternate augmentations and diminutions,
according to the greater or less demand for bank money_. If I can prove
this, all difficulties will be removed.

My reasons for being of this opinion are,

1_mo_, From principles, I must conclude, that if, upon any occasion
whatever, even when the smallest demand for bank money, and the greatest
demand for coin takes place, there was an impossibility of producing the
least diminution of bank credit, or of procuring any supply of the
metals from the bank, the consequence certainly would be felt, by an
extraordinary fall in the value of bank money; or which is the same
thing, in other words, by an extraordinary rise in the value of the
metals, when compared with bank money.

Now, this is a case which never happens. Variations upon the rate of
agio, of 2 or 3 _per cent._ perhaps more, are frequent and familiar. The
demands of trade, for coin or credit, are so fluctuating, that such
variations are unavoidable; but were there an overcharge of bank credit,
which no power could diminish, that overcharge would quickly be
perceived; because the fluctuations of the agio would entirely cease; as
the balance of a scale, nearly in equilibrio, ceases from a total
overcharge on one side.

2_do_, My second reason is founded upon a matter of fact, which I must
now apply.

There are upon the square before the town-house of Amsterdam, (the place
de Dam) between 10 and 11 in the morning, a number of cashiers, whose
business it is to buy and sell bank credit, for current coin. They
bargain with all those who have occasion either to buy or sell; and
according to the demand for specie, or bank credit, the agio rises or
sinks: and as these cashiers must constantly gain, whether they furnish
bank credit or current coin, since they are never the demanders in
either operation, it is commonly found, that there is in their favour
about 1⁄16 _per cent._ or perhaps ⅛ _per cent._ according to the
revolutions in the demand: that is to say, one who would first buy
specie, and then sell it, would lose ⅛, or perhaps but 1⁄16 upon his
operation.

From this circumstance of buying and selling of bank credit with coin,
and _vice versa_, I think I can resolve the mystery mentioned above,
viz. how the constant accumulation of coin in the bank of Amsterdam,
should never have the effect of depreciating their bank money, by
augmenting, beyond the demand for it, the quantity of their deposit, and
of the credit written in their books.

It is a matter of fact, that the bank lends both coin and credit to the
brokers, cashiers, or lombards, who are constantly found on the place de
Dam.

Whenever, therefore, the bank finds that agio falls too low, with
respect to the coin; and when, in consequence of that, the demand for
coin _increases_; then they lend _coin_ out of their repositories to the
brokers; and when it _rises_, they lend _credit_.

This coin the brokers dispose of to those who have bank money, and who
want to convert it into coin. They sell the coin for bank credit: the
purchaser writes off the transfer in favour of the broker, and he again
repays the value of the coin to the bank, by transferring the credit he
obtained for the coin, in favour of the bank.

This done, the bank may expunge this credit from their books; by which
means their deposit of coin is diminished, and also the sum of credit
which was found superfluous.

If, on the other hand, the circulation of the trade of the city should,
in a short time afterwards, begin to increase, those who have coin,
which in that case would not so well serve the uses of circulation as
the bank credit, come with it to the brokers, who sell them bank credit
for it; this coin the brokers deliver to the bank, which writes off the
credit lent to the broker, in favour of him who has paid his coin for
it.

This is, as far as I can guess, the nature of the circulation of the
coin in the bank of Amsterdam.

It is a curious method of preserving an exact proportion between the
coin in deposit, the credit written in their books of transfer, and the
demand for bank money.

The plan is quite consistent with principles, and checks exactly with
those matters of fact which are known to all the world. Whether the
operation be conducted exactly in the way I have represented it, or not,
is a matter of small consequence to us, who aim at nothing more than the
investigation _of the principles_ upon which such operations _may_ be
conducted.

When we compare this operation with those of the bank of circulation,
which we have already explained, we find a great analogy between them.

We have seen how the notes issued by banks of circulation increase and
diminish according to demand: and now we see how the same principle
operates in banks of deposit, which issue no coin on demand. In the
first case, the mass of securities, or coin of the bank, is diminished,
without the consent of the bank, by the act of their creditors; that is,
the holders of the notes. In the last case, the creditors, or persons
who have credit in bank, cannot, by their own act, diminish the quantity
of the coin deposited, nor of the credit written; but the bank itself,
by the help of those interposed persons, the brokers on the place de
Dam, is enabled to preserve an exact balance between bank money and the
demand for it; augmenting it as it is demanded, and diminishing it when
it is found to regorge.

From this I conclude, that the treasure of the bank of Amsterdam is not
near so great as some authors, from mere conjecture, have asserted.

The author of the Essay on commerce, reckons it at four hundred millions
of guilders; and the Amsterdam edition carries in the margin a
correction, which gives us to understand, that it amounts to between
eight and nine hundred millions. Davenant esteems it at 36 millions
sterling. Mr. Megens, an author of great judgment and sagacity, esteems
this treasure at no more than about 60 millions of guilders, or about
5,500,000_l._ sterling; a sum (says he) wherewith great things may be
done. Univers. Merchant, sect. 61. I agree entirely with him, that for
the ready-money demands of the trade of Amsterdam, that sum, constantly
in circulation, may go a great length.

What has misled most people in their estimation of this treasure, is the
appearance of a constant accumulation, without any restitution: but that
there is a constant egress, as well as ingress of coin to this bank, I
think I have rendred pretty evident.

Besides the permanent credit written in the books of transfer,
concerning which we have been speaking, the bank of Amsterdam receives,
in deposit, vast sums of coin every year, which are not incorporated
with the bank treasure, but remain in the bags in which they are
delivered, under the joint seals of the bank and of the person who
delivers them.

This operation comes next to be explained.

The trade of Holland draws a constant flux of coin and bullion into the
country; and that trade sends a constant flux out of it. The
establishment of the bank of Amsterdam renders the use of this coin and
bullion, upon many occasions, superfluous, as money.

It therefore remains as a commodity, the value of which rises according
to exigencies, or the demand for it.

When the precious metals come from Spain, Portugal, and other nations,
who owe a balance to the Dutch, they are lodged in the bank of Amsterdam
in the following manner.

The proprietors carry them to the bank in sacs composed of a determinate
number of pieces, and the sac must be of a determinate weight, according
to the regulations of the bank, from time to time; for which the bank
writes off credit in bank, at certain rates, according to the coin
lodged, to the account of the proprietor.

But as this coin is received, upon condition that it may be drawn out
again, so soon as the depositor shall demand it; instead of writing off
the _whole value_ upon the books of the bank, they only write off a
_certain part_, (suppose 90 _per cent._) and for the remaining 10 _per
cent._ they deliver what they call a _recipisse_, which is an obligation
by the bank to re-deliver, upon demand, the individual sacs, sealed with
the seals of the bank and of the depositor. This _recipisse_ is
transferable at the will of the person to whom it is delivered. Farther,

He who has put his coin so in deposit, becomes bound to pay to the bank
½, ¼, or ⅛_per cent._ every six months, according to the coin: that is,
upon gold ½ _per cent._ on pieces of eight and rix-dollars ¼; on
ducatoons ⅛ _per cent._ and in case he neglects so to do, then the coin
becomes consolidated with the treasure of the bank, and can no more be
drawn out, in virtue of the _recipisse_.

This being performed, the depositor may transfer, at will, all the 90
_per cent._ of his credit, in the course of his business; and so soon as
the _value of coin_ rises in the market, he must fill up his credit in
bank to the full value of the 90 _per cent._ and then presenting his
_recipisse_, he receives back his own individual coin, sealed with his
own seal, as when at first delivered.

If he finds that it is either inconvenient for him to fill up his
credit, or that he has no occasion for his coin, upon the rise in its
value, he may then sell his _recipisse_ to another, who has credit in
bank equal to the value of the deposit; and he, in virtue of the
_recipisse_ transferred to him, withdraws the coin, as the person might
have done who put it in deposit.

The _recipisse_ itself, which is what gives a right to the coin to any
one who is the proprietor of that paper, and who has credit in bank for
the sum contained in it, rises and sinks in its value, according to the
price of the coin to which it carries a right.

In this manner coin, which otherwise would be dead in a warehouse, is
made to circulate, in favour of the owner, during the deposit, remaining
at the same time always at his command; and the keeping of the coin
brings into the bank a small profit, but which, by constant
accumulation, becomes considerable.

I have said above, that the bank of Amsterdam puts forth, from time to
time, what regulations they think fit, as to the rate at which they
receive the different species of coin. These regulations are formed
according to the fluctuation of the value of the metals. When silver
rises above the proportion it had before, with respect to gold, then the
silver species is received at a higher rate than formerly. When gold
rises in proportion to silver, then the gold coins are received at a
higher rate than formerly.

This regulation produces the same effect as that, which I formerly
recommended in the third book, would do, in fixing a standard for the
unit of the money of Great Britain, according to the mean proportion of
the metals: and it was for this reason, that [Book III. part I. chap.
1.] I asserted the bank money of Amsterdam to be an invariable unit,
which the art of man had invented; that it stood like a rock in the sea,
immoveable by the fluctuating proportion between the metals.

It is no objection against this, to allege the variation of the agio,
and the fluctuation of the value of bank money according to demand.
These variations ought to be referred to the coin, not to the bank
money: the bank money is to be considered as fixed, because it has all
the characters of invariability.

If, indeed, the affairs of the bank came to be ill administred, and that
the credit written in the bank were allowed to swell so far beyond the
demand for it, as to sink the value of bank money so far below the rate
of coin as to make it impossible to recover itself; then I should allow
that the bank money was no longer an invariable standard: but in this
case, I should consider the bank as in a kind of political disease,
because it would then be withdrawn from under the influence of its own
principles, which hitherto has never been the case.

It has been imagined by many, that the treasure of the bank of Amsterdam
has been, upon certain occasions, made use of for the public service.
This is a conjecture merely; and perhaps it has been owing to the
opinion which commonly prevails, that the treasure far exceeds all the
uses which it can serve for. But as I am persuaded, 1_mo_, That this
opinion is void of all foundation; 2_do_, That the treasure never can
exceed the credits written; and, 3_tio_, That the credits never can
exceed the uses those merchants have for them: so I am of opinion, that
a value, in coin, to the full extent of those credits, actually exists
in the repositories of the bank; because if I should suppose the
contrary, it would imply a notorious infidelity in the bank
administration: an infidelity, which, if ever it should be discovered,
would overturn the whole credit of the bank, and, at one stroke, destroy
the whole trade of that city. Now the use of three or four millions
sterling, to the states of Holland, which they can procure when they
will, at a very moderate interest, is not an object in the eyes of that
sagacious government, sufficient to engage them to tamper with the bank
treasure: and the rather, that were they driven to the necessity of
having recourse to the bank, I make not the least doubt but that so
great a company would be of more service to the state in writing off
upon an occasion a _temporary, untransferable credit at interest_, which
might afterwards be expunged, in order to procure coin within the
country, than by delivering the coin corresponding to the credit of
private merchants, which they must look upon as a most sacred deposit.

If we compare the credit of the bank of Amsterdam, with the credit of
the bank of England, we shall find the first infinitely inferior to the
latter as to extent, though not one bit inferior with respect to the
solidity of it.

The extent of the credit of the bank of Amsterdam is limited to the sum
of the credits written in their books, either in permanent transfer, as
I shall call it, or in credit on cash deposited upon _recipisse_. All
this credit put together, cannot extend beyond the limits of the
circulation of the city of Amsterdam, in their domestic dealings, and in
their exchange business; which last is indeed very great.

But the credit of the bank of England is equal (in a manner) to all the
circulation and exchange business of London, and all the taxes paid in
Great Britain. This bank, in circulating its paper, is not limited to
the weight of coin in England. The whole interest of the national debt,
and expence of the state, may be paid in the paper of the bank, and be
perfectly well secured, although their treasure in coin may seldom
amount to above four millions sterling.

We must however allow, that banks of circulation, when ill conducted,
are liable to great abuse; as has been abundantly explained in treating
of the Missisippi. But how is abuse to be prevented, while men conduct?
And disasters may happen to a bank of deposit, to which the other is not
so much exposed. May not the treasure of the bank of Amsterdam be lent
out on bad security? May not the state lay hold of it? May not an
earthquake swallow up the stadthouse? May not the sea break in, and
demolish it? May not another invader, like the late King of France, in
1672, be more successful, and carry off the bank?

These are abuses and calamities to which the bank of Amsterdam is
exposed; and from many of which the bank of England is in a great
measure protected.

Besides the banks I have mentioned, not so much with a view to give an
historical account of their operations, as to illustrate the principles
on which they are established, there are many others in Europe of great
and extensive credit; such as that of Hamburg, Venice, Genoa (until the
state spent the treasure deposited) Nuremberg, &c. Every one of these
participate more of the nature of that of Amsterdam, than of those in
Great Britain. They are more calculated for preserving the standard of
their bank money, against the adulterations of coin, and for providing a
fund of cash, transferable in bank credit, than for the assistance of
government, or the melting down of solid property, which are the great
advantages peculiar to _banks of circulation_.

These last are also infinitely more lucrative to the bankers than those
of deposit, from the interest they draw from credits given, discount of
bills, and loans to government.

The profits on the bank of Amsterdam are very trifling. They are
confined to the small emoluments of 2 stivers for every transfer;
besides the interest they draw from the brokers on the place _de Dam_,
for the coin and credit they furnish them with; and, in the last place,
the ½, ¼, or ⅛ _per cent._ every six months, for the coin deposited, in
order to be afterwards drawn out. But on the other hand, they are freed
from the enormous expence of providing coin for the payment of foreign
balances, and from the great detail of business which the circulation of
paper implies.


                        END OF THE SECOND PART.

------------------------------------------------------------------------

------------------------------------------------------------------------

                                   AN

                                INQUIRY

                                INTO THE

                   PRINCIPLES OF POLITICAL OECONOMY.

------------------------------------------------------------------------

                    BOOK IV. | OF CREDIT AND DEBTS.

                               PART III.
                              OF EXCHANGE.

------------------------------------------------------------------------

                                CHAP. 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 have been sufficiently deduced, I now proceed to the
doctrine of exchange, which is the principal operation of mercantile
credit.

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 those obligations is essential to commerce;
and no sooner is a merchant’s accepted bill protested, than he is
considered as 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. 1. The drawer, who receives the value: 2.
His debtor in a distant place, upon whom the bill is drawn, and who must
accept and pay it: 3. The person who gives value for the bill, to whose
order it is to be paid: and 4. 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 100_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 accepter, (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 bill.

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, sends
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 sends 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, so 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 that those who
are creditors upon Paris would 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 that those who are debtors to Paris would 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 is known.

Now I ask, how trade, in general, is 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, relative 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 often
been 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 and 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 to themselves.

Whenever a balance is 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.

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 is
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 does result from it upon one branch
of trade, the exchange business, yet that cannot compensate the loss
upon every other.

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

This being admitted, I shall here enumerate all the difficulties which
occur in 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 has retained the whole chain of reasoning
already gone through, a repetition in this place would be superfluous:
but as that 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.

1_mo_, 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.

2_do_, How to remove the domestic inconveniences which occur in paying
with the metals or coin.

3_tio_, How to prevent the price of exchange from operating upon the
whole mass of reciprocal payments, instead of affecting only the
balance.

The remedies and palliatives for these three inconveniencies 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 that operation.


------------------------------------------------------------------------


                               CHAP. 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, bullion, or in a nation’s coin, or in
denominations of money of account. All payment 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 determined.

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 that 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, that 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 as what is 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, ⅛ 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 1½ _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 is the number of grains 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._ 10½_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, 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 that value in Paris and in
London, viz. 4.2476⁄93.926 = 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
4.3999⁄101.7 = 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 raises bullion to the price of coin; and that a
right balance brings 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 combining
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 remaining in circulation, the price of bullion
rises in proportion.

Is it surprizing that, at London, gold in bullion should be worth as
much as gold of the same standard in guineas, weight for weight? It is
worth as much at the mint, why should it not be worth as much at market?
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 29½_d._ if you reckon by the silver, or 30¼_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, only from the additional weight 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 great 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 combinations 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 one place to the other, the
insurance of them, and the exchanger’s profit? If this be true, which I
believe no body will deny, must not what is paid for the bill, over and
above these three articles, be considered as the real par, relative 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 that 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. That 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[20].

Footnote 20:

  There occurs another considerable difficulty to be removed, before the
  real par of exchange can be exactly determined from the price of
  bullion, to wit, the uncertainty of weights, and the multiplicity of
  them.

  Every nation in Europe has a different weight, I might almost say
  every city. This has proceeded, in a great measure, from the
  inaccuracy with which they have been made formerly. I think it is
  highly probable, that many, at least, of the principal weights in
  Europe, have derived their origin from the same standard; although
  they are now considerably different. Those I am best acquainted with
  are the following, of which I shall here set down a short table,
  reduced to troy grains, according to the best calculation I have been
  able to make.

 One ounce troy contains                            480 troy grains.
 One ounce Paris, or _poids de marc_,               473
 One ounce Holland troes                            473.27
 One ounce Colonia                                  449.33

  These are the weights used in the mints of England, France, Holland,
  and Germany.

  If therefore we should call the troy ounce 100, the proportion of the
  rest will be as follows:

 Troy                                               100
 Paris                                               98.541
 Holland                                             98.597
 Colonia                                             93.61

  I have chosen to reduce to ounces; because it is the denomination in
  which the proportion of weights is best preserved.

  These ounces I apprehend to have been originally taken from the old
  Roman pound, which was the weight adopted by the Emperor Charles the
  Great, who applied himself much to the establishing a general standard
  of weights in his dominions.

  In the examples I have given, we see how the Colonia ounce deviates
  more than any other from the average on the whole.

  This ounce is very near equal to the old Saxon ounce, established in
  the English mint at the Norman conquest, and there preserved, until
  Henry VIII. substituted in its place, the troy weight. This
  circumstance makes it probable that the Saxon ounce came originally
  from Charles the Great, who first conquered the Saxon nation, and drew
  them from a state of absolute barbarity. The rude manners of the
  Saxons may have occasioned this great deviation.

  The difference, therefore, in those ounces, I ascribe to the
  progressive error of those who have made weights, and from the neglect
  of preserving a proper standard.

  The best remedy for this inconvenience, would be, for any one mint to
  form a weight, _ad libitum_, and to send a most accurate copy of it to
  every mint in Europe: to mention, at the same time, the exact
  proportion between the weight sent, and that observed at their own
  mint: to beg of the other mints an equal communication of the
  proportion between the weight sent, and their several standards: and
  last of all, to publish in the news-papers of all commercial towns,
  every market day, as is done at Amsterdam, the price of _fine_ gold
  and silver, according to this new weight made for the purpose. This
  weight may be called the mint-weight of Europe; and from the universal
  utility which would follow upon such a regulation, it probably might
  be followed: were this to happen, it might be a step towards
  establishing an universal conformity of weights every where.

  While matters stand on the present footing, it is necessary to be
  informed of three particulars. First, Of the proportion of the
  different mint weights. Secondly, Of the regulations by which the coin
  is made. And lastly, Of the exactness of the mints in following the
  regulation. Every mistake in any one of these three articles, is an
  impediment to the just determination of the real par.

  I acknowledge that, in fact, exchange business goes on smoothly,
  notwithstanding all the difficulties we have been enumerating. It may
  therefore be asked, in what would consist the great advantage of so
  scrupulous a nicety?

  My answer is, that exchange business will always go smoothly on, as
  long as exchangers gain, and that trade is not interrupted.

  But trading men consider their own interest only; and I am configuring
  the interest of an intelligent state, which wants to promote the good
  of the whole community, without occasioning any hurt to the interest
  of individuals.


------------------------------------------------------------------------


                               CHAP. 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 that case, should facilitate by every method the
sending them off in the cheapest and securest way.

But since governments do not follow that 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, relative 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 that situation the alternative to
government is very disagreeable. Either the rich must be deprived of
every enjoyment 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 directs 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 with good regulations,
properly executed, 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. What nation will trade with
another who can pay only by barter? All credit will then 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 the contracting of debts with
strangers; but when you allow them to be contracted, to facilitate the
payment of them.

This reasoning is only 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, to his people; and this while he is
forming a scheme of introducing industry at home, as a basis for
afterwards establishing a proper foreign commerce.

But in this subject combinations are infinite, 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 combinations, one from history, and another from a
recent example in France, in which a clog upon the exportation of the
metals and coin were 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 oeconomy.

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

Under such circumstances, is it not plain, that the prohibition of the
exportation of bullion and coin was only a compulsion, concomitant with
other regulations, to oblige 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 those measures, the whole money of the
nation would have been exported; the superfluous natural produce of
England would have lain upon hand; the abundance of these would have
brought their price 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 a desire to consume foreign
productions, and to forbid the exportation of the price of them. I also
allow, that every restraint laid upon exporting silver and gold, falls
upon 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 forbidden; 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 that
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 no body 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 to prevent the
payment of what people owe; but 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 it is not given for nothing. But when the balance turns
against them, 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 that kind ought to
be general; because it then affects the useful and the hurtful branches
of importation equally: 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 combined, 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 that was not the
case.

The example taken from France is this.

After the fatal bankruptcy in 1720, by the blowing up of the Missisippi,
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 value they had sent 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.

But besides the interests 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, from whatever cause it may proceed, that the
value of a nation’s coin falls to par with bullion of the same fineness,
that 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 upon every occasion.

If, therefore, a nation does really desire to avoid an expence to 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 its going out unnecessarily,
or if it be necessary to export it, the coin will return in the payments
made to the nation, in consequence of its advanced value above any other
bullion which can be sent.

The forbidding 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 is not 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 their trade, a balance coming in from other
countries, should lay it down as a general rule, to facilitate the
exportation of their coin, as well as bullion: and if a very particular
circumstance should occur, which may continue for a short time, they may
then put a temporary stop to it, and facilitate the payment of the
balance in the way 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 that 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 owes 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 money be indebted to no body, 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 a 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 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.


------------------------------------------------------------------------


                               CHAP. IV.
  _How the Price of Exchange_, in a prosperous trading Nation, _may be
prevented from operating upon the whole Mass of reciprocal Payments, in
                 place of affecting the Balance only_.


We have taken it 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 that 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 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 only does
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 which 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,
relative 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 only benefited or hurt by
the net balance which it receives from, or pays to her neighbours: and
that the whole expence of paying or receiving that 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 not conversant in commerce. I shall acquit myself of this difficult
talk 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 to the nation-creditor; the
creditors to 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 or not, upon the whole, the price
of the exchange in this case be favourable to London, to which, by the
supposition, the balance is due, and unfavourable to Paris, 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 to 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 to 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 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 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 to the nation-creditor will receive it; and as both are
Frenchmen, the profit and loss to Paris exactly balance one another.

But the debtors to 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, to 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 are 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 strongest: 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 only in relation 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
that 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
those 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 they
are indebted.

The transportation and insurance of this balance is an expence to those
who owe it, and the profit, if any there be on that operation, naturally
falls to exchangers of the same nation, who conduct it. So whether
exchange be paid upon bills drawn, or expence be incurred in the
transportation of balances, no profit can accrue upon that 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, of bringing the 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 to the nation-debtor: which is a
combination 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
upon the extravagant profit of exchangers arises: and from this
combination arises 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 is 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 the other, exchange thereby operates a national compensation; it
will not be improper, in this place, to throw out one reflection more,
in order to destroy the strength of that argument.

Were this proposition admitted, as I am afraid it cannot, from what we
have already said, it affords no argument against doing what can be
done, to render exchange as little hurtful as possible to exportation,
during the favourable balance. But 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 the exchange affecting the exporters, in proportion as it
augments, discourages 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 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 that compensation which is given to exportation by 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 those 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 it 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,
from 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, that there was a general outcry. The
Cardinal, to put a stop to the clamour, and set trade 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. 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 all 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; and 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, and the alteration which had been made at that time upon the
denomination of the new: and that so 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 that 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 for the bills by the merchants at Paris?

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 the charge of exchange to traders:
but the consequence of either neglect, or incapacity in the man at the
helm, would then become so fatal that it might be dangerous to attempt,
at once, so great a change in the present method of paying balances: but
I never make allowances for the defects of a statesman, while I am
deducing the principles which ought to direct his conduct.

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 that, 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 either coin or paper in circulation, as
has been explained in treating of banks of circulation upon mortgage.

The consequence of this 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 not. 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 those sums been transacted by exchangers, who
have made great fortunes by it? Are not the most unfavourable balances
paid in the ordinary method? Are there not, therefore, already,
instruments in the hands of all nations, sufficient for their undoing?
How could their ruin be accelerated by this alteration in the mode 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 _these_, 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 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 inclines to try the consequences of it by an
experiment now and then, 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.


------------------------------------------------------------------------


                                CHAP. V.
    _How, when other expedients prove ineffectual for 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. 1. How
to estimate the value of a balance due: 2. 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 is constantly done by every nation; but as the ordinary
methods 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 equally thrown 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. 1. The
great importation and consumption of foreign productions. 2. The payment
of debts and interest due to foreigners. 3. The lending money to other
nations. And 4. 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 would 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 is better for the nation, _in cumulo_, to lend
its assistance, and share the burdens, 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 what cause 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 are 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, 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 tends
so much to encourage every branch of commerce.

We have abundantly explained the fatal effects 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. There is therefore nothing
new in this proposal: it is only carrying the consequences of the same
principle one step farther, by pointing out, as a branch of policy, how
government should be assisting to trade in the payment of balances,
where credit abroad is required; and 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 there was a proposal made for lowering the rate of money, by
refunding the debts which bear a higher interest than what money can be
procured for, were the continent to 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 beat
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 combinations which such
an operation must imply. I therefore shall not attempt what, at any
rate, I must leave imperfect. What has been said, combined with what has
been thrown out on the same subject, in treating of other matters, is
sufficient to give a hint, as to 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.


                         END OF THE THIRD PART.

------------------------------------------------------------------------

------------------------------------------------------------------------

                                   AN

                                INQUIRY

                                INTO THE

                   PRINCIPLES OF POLITICAL OECONOMY.

------------------------------------------------------------------------

                    BOOK IV. | OF CREDIT AND DEBTS.

                                PART IV.
                           OF PUBLIC CREDIT.

------------------------------------------------------------------------

                                CHAP. I.
             _Of the various Consequences of Public Debts._


The principles which influence the doctrine of public credit are so few,
and so plain, that it is surprising to see how circumstances could
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 confounded so 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, 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 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 the 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 rendred 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 set
itself free, 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 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 in 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 transport, 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 only in proportion 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 money’d
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
money’d interest to swell: but in monarchies, where the landed interest
is 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 pay, and those who receive
the taxes, under the denomination of creditors, the security of public
credit becomes precarious.

From this we may conclude, 1_mo_, That in governments where the swelling
of a money’d 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.

2_do_, If natural causes 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.

3_tio_, 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.

4_to_, 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.

5_to_, 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 of 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 combination, is, I
apprehend, impossible; because every one of them will depend upon
circumstances totally unknown. These, 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.


------------------------------------------------------------------------


                               CHAP. II.
              _Of the Rise and Progress of Public Credit._


While the policy of Princes 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 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 that great 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 their 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 administred with more uniformity; and from this 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 lodged,
in a great measure, in private coffers. If wars brought them forth for a
short time, they soon found their way back again. Princes 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
Hans-towns, 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 countries to which they durst not resort 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
that 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 liability which is necessary to establish a firm confidence. In
proportion as it drew towards 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 inconveniencies.

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 that
purpose: and the refunding of the capital was, in many cases, left in
the option of government, but was never to be demandable by 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 writ 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 a confusion, and so many
calamities, could have followed upon the operations of public credit.


------------------------------------------------------------------------


                               CHAP. III.
_Of Anticipations, or borrowing Money upon Assignments to Taxes for the
                 Discharge of Principal and Interest._


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 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, and
to pay afterwards 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 writ on 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 estate, 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 à 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_,
_chevaucheês_, _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 mention 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 3⅓ _per cent._ upon all meat, drink, and merchandize, sold in France
within the year; that is to say, upon the whole alienations of France.
The tax was levied, but fell so far short of the sum required, that it
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 preceeded, that in 1356, the septier of wheat, or 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 12 Winchester bushels a year. Now
let me suppose, that the whole 50,000 livres had been raised by this
imposition of 3⅓ _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 that 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 was 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. So
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 only 400
years ago! It would be in vain to seek for examples to illustrate any
principle of our complicated modern oeconomy in the histories of those
times: their taxes, their credit, and their debts, resembled ours in
nothing but the name.

I 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 æra of public credit in
England.

No person at that time, whose writings I have seen, appears to have so
thoroughly understood those matters as Davenant. He was a man of theory,
as well as knowledge of facts: he had an opportunity which few people
have, to be well instructed in the one and the other; and he turned his
talents to the best advantage for promoting the interest of his country.
He has writ 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 of 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 advanced money to government, and who were paid by
assignments upon taxes previously engaged, made people afterwards very
diffident, except upon proper security. The limited form of the English
government, prevented the violent proceedings between ministers and
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 of 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
advances, 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 of about 1300 millions; because he had settled
them 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 providing 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; and to point out the methods of
making them severally turn out to the best account for the state,
considered as a body politic by itself, and 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 only be guessed
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, only afford 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 the great change of
sentiments at present proceeds.

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 3½ 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 3½ 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 that 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 had not then been discovered, for turning property into money.
Circulation, consequently, was confined to the coin; and profits on
trade were very great. All these circumstances rendred 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 only of value
in proportion 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 that 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
that imposition. It had taken place in England as far back as the great
civil war, and formed at the revolution about ⅓ 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
was, at that time, 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 enterprize 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; and 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 post-house, 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 linnen. 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 would 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._ and 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 that value into
money. The whole of the money coined before the end of the war in 1697,
did not amount to 8½ 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
notable 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.


------------------------------------------------------------------------


                               CHAP. IV.
_Of the State of public Credit in France before the reign of Louis XIV.
     and of the Sentiment of the great Richlieu upon that Subject._


Having laid before my reader the sentiments of Davenant on the subject
of public credit, which were analogous to the then state of England, it
may be instructive to compare them with those of another very great man,
in a rival nation; I mean the Cardinal de Richlieu.

The constitution of Great Britain at present, is pretty much what it was
in Davenant’s time: and that of France does not differ widely from what
it was at the death of Louis XIII.

Britain and France are two nations, rivals in every thing worthy of
emulation, and similar in those distresses which are the inseparable
concomitants of modern ambition, debts and taxes.

As long as the constitution of the two governments shall stand as at
present, Britain will constantly have the advantage in borrowing: France
will have it in paying off her debts. It is this contrast which engages
me to enter into the following detail. I consider it not only as a piece
of historical curiosity, but as a subject of profound reflection, from
which much instruction may be gathered.

The fate of kingly power was decided, both in Britain and in France,
much about the same time. In France, it was supported by Cardinal de
Richlieu; in Britain, it was broken to pieces under Charles I.

Before that time there was no fixed form of government established in
either country; nor can ever a regular constitution take place any
where, until the mechanism of a state becomes so complex as to render
changes extremely difficult. This is becoming the case more and more
every day; and upon this and nothing else will depend the stability of
our present forms.

Let us now take a view of the sentiments of a great minister, delivered
in writing by himself, in his political testament; the authority of
which would never have been called in question, had the matter it
contains been properly attended to, and well understood.

It is in the 7th paragraph of the 9th chapter of the testament, where
the Cardinal shews his ability in paying off the debts of France: and in
going through the subject, he casually has thrown out several things,
which enable us to form a judgment of the state of taxes, and of the
effects they were found to produce in his time.

“It is pedantry,” says he, “to maintain that a prince has no right to
draw money from his subjects, and that he ought to content himself with
the possession of their hearts. None, however, but flatterers, the pest
of society, can maintain, that he may draw from them, justly, whatever
he thinks fit; and that his right extends, in this particular, as far as
his will.”

The taxes of France at this time had been augmented far beyond heir due
proportion; and this had produced many strange and contradictory
phænomena; which, as we shall now see, misled the Cardinal in many
respects; because his experience was not sufficient to discover the
causes of them.

“The augmentation of impositions on the people,” says he, “does the King
_so much_ hurt by raising prices, as to compensate all he can gain.” If
we suppose that the King gained by the augmentation; that is to say,
that the tax, when increased, really produced more than before, and
raised prices proportionally; then the King could only lose his
proportional part, but never the whole. If the tax, by being augmented,
produced less than before, which was the case often, then he lost by a
diminution upon his income, not by the rise of prices. But this was not
the case; because deficiencies of that kind could not fall upon the
King, but upon his farmers.

The true reason was, that the King paid most of his expences by
assignments upon the taxes; and then, no doubt, the higher they were
raised, and the more difficult to recover, the dearer every undertaking
would cost the King.

This reasoning upon the effect of taxes shews, that at that time the
doctrine of them was not well understood. No wonder: theory is not
sufficient to lay open political consequences, even to the greatest
genius. All our information as to these matters arises from experience,
and all our instruction from our attention and reflection.

As a proof of this, he mentions, almost in the same place, an effect of
the increase of taxes, which is quite contrary to the former.

“Consumption,” says he, “diminishes, as taxes augment.”

This is a contingent, but not a necessary consequence, as we have seen,
and has the effect of lowering prices.

I mention these particulars, only to shew how little this great man had
studied the principles of taxation, or combined the causes of those
phænomena which he saw arising from them.

Such contrary effects could not fail to be felt, when taxes were raised
in the manner usual at that time, and when no method was contrived for
augmenting the currency.

In Richlieu’s time the custom was to treat with the _partisans_, as they
were called, or undertakers for the farm of taxes; and for a sum of
money, valued at a certain interest, to give them a right to levy
certain impositions on the people, esteemed equivalent to the rate
agreed upon; some in one province, some in another, as the parties could
agree. Then the partisans fell to work with the people, and committed
the most horrid extortions. In the 4th §. of his 4th chapter, he says,
“The abuse is carried such a length, as to be quite insupportable, and
must end in the ruin of the state; the people are plundered, not taxed;
fortunes are made by rapine, not industry: using the partisans like
spunges is very just; but liable, on the other hand, to great abuse,
when not conducted with moderation and justice.” This is a very
different system of taxation from that carried on in England in
Davenant’s time, and must have produced effects very dissimilar.

But it may be asked, if these partisans in France had found out means of
raising money, far beyond the King’s intention; what prevented the
Cardinal from examining into such means, and using them in a gentle and
equitable manner, to the extent only of satisfying the creditors for the
money borrowed from them?

In those days several difficulties occurred, which rendered this
expedient impracticable.

1_mo_, The partisans would lend in no other way; they would have nothing
to do with the King as a debtor: his credit was not well established;
and by having the direct administration of a tax, they considered
themselves as more secure.

2_do_, Had the King levied the money on the people, and been paymaster
to the creditors himself, there would have been no gains to the
partisans but what were stipulated: had they exacted more than legal
interest, they exposed themselves to great danger; and consequently
would not lend. So, by delivering up the people to be plundered, the
King made a better bargain, he thought, than any other way; and if the
partisans plundered the people, the Cardinal plundered them in his turn.

3_tio_, At this time there were not, as now, merchants of extensive
credit, and fair character, who serve as interposed persons for the
whole money’d interest in Europe, and who can fill a subscription for
millions with a single name.

The partisans themselves, as the Cardinal observes, had often neither
money or credit at setting out: but by parcelling their undertaking into
many hands, they got together what was necessary. Thus the subaltern
associates were in a moment, like locusts, spread over the whole face of
the country, and plundering went on in every quarter.

This represents a quite different system of credit from what we see
established, even in France, at present; where the tax-gatherers are
still loudly complained of, though much more than they deserve. The mode
of raising the taxes is now most exactly specified by the King; and
nothing more can be exacted than according to the plan laid down; but in
every case severe penalties are imposed upon frauds, and when levied,
are accounted for to the farmers; but when compounded for under-hand,
sink into private men’s pockets.

In a country where taxes are rightly established, industrious people
have no occasion to indemnify themselves by fraud for the taxes they
pay; they have a more certain method of being refunded. This shall be
explained in its proper place.

By this method of oppression in the Cardinal’s time, a great part of the
odium was removed from the King, and cast upon the partisans. The people
resembled a dog who bites the stick with which he has been struck,
instead of biting him who holds it[21].

Footnote 21:

  Thus were taxes established in France, in spight of the great aversion
  of that nation to them. The exigencies of the state were apparent;
  Princes were considered as under an absolute necessity to find money
  at any rate; they appeared to be in the hands of unrelenting usurers,
  who became the execration of the people, to whose fury they were
  sometimes delivered over, when stripped of their wealth: the people
  were now and then relieved of a part of their burthen; the tax
  remained under milder management; formed an addition to the King’s
  revenue, and served as a fund for future emergencies.

  But the nature of man is such, that the more he grows in wealth, the
  more the desire of spending it increases. Thus the fund provided for
  unforeseen emergencies, is insensibly incorporated with that which is
  appropriated for the current service of the state.

  Nothing however is more certain than that in time of war, far greater
  sums are required than any people can pay, without contracting debts.

  Is it not then indispensibly necessary, either, 1_mo_, To have a sum
  locked up in treasure? Or, 2_do_, A fund appropriated, to borrow upon
  in time of war, which may serve to pay off the debts in time of peace?
  Or, 3_tio_, To borrow upon the stipulation of an annual payment, which
  may, in a certain number of years, acquit both interest and principal?
  The first is the plan of the King of Prussia; the second that of
  England; the third is, in a good measure, that of France: Holland
  borrows no more, and pays as she can what she owes; Spain lives on her
  income; and Austria remained in the old way till very lately, without
  credit, and consequently without much debt.

I have now said enough to point out the method of borrowing money in
France at this time, from which the nature of the security may easily be
gathered.

The Cardinal, upon the supposition of an approaching peace, enters into
the plan of paying off what had been contracted. He was resolved to
preserve credit; for even at that time, the consequence of that great
engine was sufficiently felt by this great man, to relieve the people,
and to get rid of the debts.

After a long detail of all the branches of the revenue, and after
shewing how they might be improved, he draws out a general state of
them, and of the debts affecting them; and then adds, “The total revenue
of the kingdom amounts to near 80 millions;” (the silver was then at 27
livres 10 sols the marc fine, which, valued at 2_l._ 4_s._ sterling,
makes the 80 millions worth above 6 millions sterling) “of which there
is above 45 millions engaged for the debts. By good management I pretend
that this immense load of debts, which seems to be the ruin of the King,
shall turn out to his ease and opulence. Some imagine it would be a
right measure to free the state entirely of her burthen, (a general
spunge) but as she cannot, certainly, support all the burthen, so
neither does reason dictate that she should be entirely set free.” No
modern statesman could form a better judgment of things. The Cardinal’s
ideas are just and profound; and it is astonishing how a man
uninstructed by our experience should see so far into remote
consequences.

He next lays down different schemes for paying the debts, upon the
return of peace and tranquillity. They are all arbitrary, more or less,
according to the standard of English ideas of credit. But if we abstract
from one expedient lately discovered, to wit, the diminishing the
interest, and allowing the capitals to remain, I doubt if any modern
statesman could discover any other than those which the Cardinal has
proposed.

A preliminary step to all his schemes was, _by an act of power_, to
reduce the debts which bore a higher interest, to that of the 16 penny,
or to a little more than 6 _per cent._ This method of reduction has
constantly been and is still practised in France.

Then he proposes to enter into an account with the creditors for the
sums they had received; and to consider whatever they had obtained above
the legal interest, as payments in part of the capital.

This scheme however he rejects, upon examination. He says it is
agreeable to equity; but that it would have the effect of totally
destroying all credit for the future.

The second expedient was, to reimburse the creditors the sums which they
really paid for the annuities assigned to them: but that he found
impossible to verify; because they had had the address to specify, in
their contracts, sums far exceeding what they really paid. For this
reason he rejects the second expedient also; and adopts a third, as the
best plan of any for paying off the debts. This was, to value the
capitals at what they then sold for in the market, before the peace was
concluded.

This method appeared to the Cardinal the most equitable, at least he
says so, and the only one practicable; but in my opinion it was the most
arbitrary of the three; the most liable to abuse, and the most opposite
to the principles of public credit, as at present established: and yet
it is a thought, which, when conducted with justice, may upon some
occasions answer excellent purposes, as I shall observe in a proper
place.

Had he adopted the first expedient, of ascertaining the value of the
real advance, there was an appearance of justice; because the creditors
were thereby represented as usurers; and by repaying them what they had
advanced, by the enjoyment of an income above the legal interest, he
treated them with more indulgence than the laws allow between private
persons: but when money was borrowed in time of war, a higher interest
should have been allowed for it than in time of peace, when it was to be
paid off; and therefore to take the standard of peace, in reckoning with
the creditors who had lent in time of war, was an evident injustice.

Could he, according to the second scheme, have discovered exactly the
sums which had been paid for the annuities given, and offered
reimbursements upon that footing, less could have been said against it;
because the mentioning more in the contract than what had been paid, was
a palpable fraud against the King.

The third method, which the Cardinal approves of, contains this piece of
great injustice, that the antient creditors of the state who had paid 12
years purchase for their contracts, that is, those who had lent at about
8 _per cent._ might by this scheme be paid off with one half of what
they originally paid. If it be answered, that nothing is worth more than
what it can bring; I answer, that it may be worth more than what it can
bring _at a particular time_. During a war, an annuity which had been
bought at 12 years purchase in time of peace, will fall to five,
providing annuities can then be bought at that rate. The new loans
constantly regulate the value of the old capitals; but upon a return of
peace, they will rise to the original value.

Another injustice here was, that a minister, by borrowing a sum at a
very high interest, at a time he wanted to set a value on the capitals,
might sink this value. And, in the third place, the greatest injustice
of all consisted in this, that the Cardinal had no thoughts of any
reimbursement, as we shall see by what follows.

There was, at this time, one class of annuities constituted at 8 _per
cent._ These he proposed to reduce to 6 _per cent._ as above, by his
preliminary operation. Such annuities sold at that time for five years
purchase. These, says the Cardinal, _we must fix at that value_; and by
allowing the proprietors to enjoy them for 7½ years, the capital and
interest will be paid off.

Other annuities constituted upon the _taille_ sold for six years
purchase, which, by the same rule, were to be paid off in 8½ years.

The annuities and other debts charged at this time upon the _taille_
alone, amounted to 26 millions a year; and by this scheme, the whole was
to be paid off in 8½ years.

Besides these, there were engagements upon other branches of the
revenue, which sold at different prices. All were to be set upon a
proportional footing. The annuities which sold the dearest, were at 7½
years purchase, which were to be paid in 11½ years.

Thus, by the Cardinal’s scheme, the debts of France, which at this time
bore an interest of about 45 millions, were entirely to be paid off, in
about 12 years, without any new imposition; and when that was concluded,
the lands were to be discharged of 26 millions of yearly _taille_, near
two millions sterling, and the King was to have a clear revenue of 53
millions, or about 4 millions of our money, which with the 26 millions
taken off the _taille_, make 79 millions; the total amount of the French
revenue at that time.

I shall now point out the characteristic differences between the
principles upon which the credit of England and France were established,
at the two periods of which we have been speaking.

Had two such writers as Davenant and Richlieu been to be met with in the
same age, and at a time when England and France were engaged in
contracting debts, the contrast would have been stronger; but as it is,
it suits our purpose. The debts contracted in France from 1708, when
credit fell, to the end of the war in 1714, were in consequence of
rapine and extortion, as in Richlieu’s time: and the operations upon
them, after the peace of Utrecht, resemble those of Richlieu in some
very material circumstances. Such as, 1_mo_, That all the debts were
then, by an act of power, put at 4 _per cent._ without any regard to the
original stipulations. 2_do_, That what the Cardinal despaired of
accomplishing, the Regent undertook, and executed, at a great expence to
the King, and with great injustice to many individuals.

He established a commission, called the _visa_, to inquire into the
unfunded debts, which amounted to 600 millions. His intention was, to
discover the effective sums which had been paid for the grounds of debt.
The most favourable classes of these debts consisted in arrears of pay
to the army, indemnities for pillage, and the like, constituted by notes
issued from the office called the _extraordinaires des guerres_, which
were diminished ⅕; the second class was diminished ⅖; the third class ⅗;
and the last of all, sums due to brokers, usurers, &c. were diminished
⅘.

But alas! there was not the least shadow of justice in this operation;
because long before the _visa_ was established, most of the grounds of
those debts had circulated from hand to hand, under the greatest
discredit: so that the real sufferers were then beyond the reach of the
indemnity offered; and the usurers and brokers who had bought them up,
were those who made fortunes by them. The Cardinal’s plan of paying at
the selling price, would have proved, _in this particular case_, more
rational, and more according to equity, than any other: so greatly do
circumstances influence our decisions in all political matters!

By the _visa_, the 600 millions were reduced to 250 millions, and put at
4 _per cent._ like all the other debts. No plan was proposed at first
for paying off the capitals; but a sum was appropriated, though very ill
paid, for discharging the interest. We have discussed sufficiently the
famous operations of the Missisippi; by which an attempt was made to
throw the whole national debt on the company of the Indies; and we have
seen how it succeeded.

The distance, therefore, of Richlieu’s time, from Davenant’s, occasions
very little deception in comparing the principles of French and English
credit: and when we come to examine the present state of that question,
I am afraid we shall find, in France, enough of the old system still
remaining, to verify my observation, that the French have the advantage
in paying their debts; the English, in contracting them. Where the
balance of advantage may lie, will be the subject of more speculation.

The first essential difference I find between the credit of France and
that of England, in the two periods we are considering, relates to the
_coin_. In the first, the value of _it_ had been very well preserved: no
considerable alteration had been made upon _it_, from 1602 to 1636, that
the Cardinal raised the denomination of the marc of fine silver, from 22
livres to 27 livres 10 sols, as has been said. Whereas from the
revolution, until the establishment of the bank in 1695, the _coin_ had
suffered in England a debasement, from clipping, of near 50 _per cent._
This circumstance, more than any other, affected the credit of England,
and increased the expence of King William’s war. In Richlieu’s time,
circulation and trade had made more progress in France than in England
at the time Davenant lived. The revenue left by Henry the Fourth was
double to that of England at the revolution: and, in general, the income
of the Kings of France had far exceeded that of the Kings of England,
for many reigns before that of the great Henry. Borrowing also, upon a
fixed and permanent interest, had been known in France so far back as
Francis the First.

That Prince was the first, I find, who contracted a regular debt, at
perpetual interest, upon the town-house of Paris, at about 8 _per cent._
when the legal interest in England, under his contemporary Henry the
Eighth, was 10 _per cent._

The predecessor of Francis, Louis XII. had of gross revenue, charged
with his debts, which eat up near one half, above 2,500,000_l._
sterling. Dutot, Reflex. Pol. Vol. I. p. 204. Francis I. left to his
successor in 1546, a gross revenue of 2,685,314_l._ sterling, and of
nett income 2,287,998_l._ according to Dutot and M. de Sulli.

Under Henry II. and Francis II. the gross revenue stood at about
2,618,000_l._ sterling.

Under Charles the IXth, I have not been able to discover any thing which
can be relied upon: but his successor Henry III. according to Sulli,
had, in 1581, a revenue of 3,250,000_l._ sterling, and left only about
16 millions of livres of debt, which was no great sum.

To this Henry IV. succeeded; and by the capacity and unwearied
application of his great minister M. de Sulli, it was raised to above
six millions sterling, at the beginning of the reign of Louis XIII. This
revenue, by his wars and expences, was left greatly incumbered; but
still the taxes were established which brought it in; and so early in
the reign of his successor Louis XIV. as the year 1683, his revenue
extended to no less than 9,182,914_l._ sterling, according to Dutot.
Reflex. Pol. Vol. II. p. 256[22].

Footnote 22:

  These sums are all converted into sterling, according to the value of
  the French livre at the different periods here mentioned.

Let any man, acquainted in the least with the history of England,
examine the fixed revenue there, under Henry VII. and VIII. Edward,
Mary, and Elizabeth, and their successors, down to the revolution; and
they will evidently see the great disproportion of wealth, proceeding
from taxes, in the one and the other kingdom.

From these facts I conclude, that debts and taxes in France were much
more familiarly known in Richlieu’s time, than possibly they could be in
England when Davenant wrote.

Public credit had long grown up in that kingdom, under the hard
influence of regal power: whereas in this it had sprung up lately, under
the protection of liberty, and a most limited authority.

To that cause I ascribe the difference we find between the principles of
English and French credit; and to an effect similar to the cause I
ascribe the gigantic steps by which Britain has outstripped her powerful
rival in the establishment of her credit, since the beginning of this
century.

It is folly to prophecy, I know; but I may be allowed to conjecture,
that the same causes which have raised the credit of this nation to such
an amazing height, will either force the French from their old
principles, or they will, some time or other, bury her credit in the
dust.

Had one half of the acts of power been exerted with us, which have been
so familiar in France: had half the liberties been taken, in tampering
with the claims of creditors; a total bankruptcy would long ere now have
been the consequence: but in Britain credit is young; and has been
tenderly reared. In France she is old, and has been accustomed for many
ages to rougher usage. But example works wonderful effects, especially
when nations live together in this great European society; and the
advantages of a security to be depended on will every day more and more
engage the money’d interest to prefer this to any violent and precarious
profits.

How nicely does not Davenant employ political arithmetic, in order to
make true estimates of the taxes to be imposed, and appropriated for a
term of years, for extinguishing principal and interest? How exactly has
not the account between the state and the bank been carried on from
1695, to this day? How faithfully have not all parliamentary engagements
been observed? When, in 1749, a most natural operation was performed, to
reduce the interest of the debt of Great Britain, by gentle steps, from
4 to 3 _per cent._ what an outcry did it not make, although an
alternative was left to the creditors, either to receive an actual
reimbursement, or to accept of the new terms? The credit of Great
Britain must have appeared to France in the light of a pettish child,
educated in the house of a too indulgent parent: her own is not treated
with such gentleness; and when our money-jobbers try their hand at
Paris, and meet with disappointments from unexpected acts of council; to
prevent the laugh going against them, for trusting to the credit of
France, they turn it off by a jest, and pretend that they were only
playing as at the Groom-Porter’s, or in Change-Alley.

In a word, what would totally ruin the credit of England, does not
equally affect that of France. An act of power there, no doubt, throws a
damp upon it for a time; and if that act of power takes place at a
critical juncture, it may cost her very dear; as it has lately cost her
the continent of North America; which, I think, was sold for 32
millions, withheld from her creditors, for a short time, in the end of
1759. But this act of power, and many others since, have not ruined the
credit of France: many trust her still; only those who purchase in her
funds, at present, take about 2 _per cent._ off from their interest, as
a premium for the insurance of her good faith, until she recovers her
mercantile reputation[23].

Footnote 23:

  Money invested in the French funds, _anno_ 1766, will bring the
  purchaser 6 _per cent._ This I consider as 4 _per cent._ for the
  interest, and 2 _per cent._ premium for the risk; and were she now to
  borrow any considerable sums, I suppose the insurance would rise in
  proportion.


------------------------------------------------------------------------


                                CHAP. V.
       _Of the present state of public Credit in Great Britain._


We have, in a preceeding 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 millions
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 reduced to one half, in the last years of King William, and put at 6
_per cent._ perpetual annuity, to commence from 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 succession, with what it was at
her death, we shall form a general notion of the progress of credit,
debts and taxes in England during that period.

   The revenue of England at the accession of
 Queen Anne may be stated at about                           £2 272 000
   The debts subsisting on the 31st of
 December 1701, were                            £6 748 780
                                                 —————————
   Upon which the annual interest was              566 165
   Queen Anne’s civil list[24]                     600 000
                                                 —————————
   Which two sums amounting to                                1 166 165
   Being deducted from the revenue, there will remain        ——————————
   for the current service of the state                       1 105 835

Footnote 24:

  The Queen got from parliament 700,000l. for her civil list; but she
  immediately ordered 100,000l. to be annually paid to the uses of the
  war.

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 those 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 be
suspended 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, was pure profit to the bank, and 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 suspend: so that
after this great debt had circulated upon the discredited obligations
which had been issued for it, and in that 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 real 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 rises
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 might 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 additional 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 charges laid upon them 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 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 was
satisfied with a reduction to 5 _per cent._ of that paid 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, whose capital 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 great profits to arise from such a
fund under one administration, formed a project of acquiring a large sum
of the public debts, which remained outstanding upon the original funds
appropriated for them.

For this purpose they proposed to government to acquire, 1. 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. 2. To acquire a sum 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. 3. They were
to have a sum added to their former allowance for the charge of
management, in proportion to this augmentation of their stock. 4. That
for the advantage which might follow upon this agreement with
government, they were 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[25].

Footnote 25:

  After the long and particular account I have given of the Missisippi,
  I shall not enter into a like detail, concerning a scheme which
  proceeded upon the very same principles; to wit, the artificial
  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, compare some of the operations of the South Sea scheme,
  with those of the Missisippi; and in doing it, point out the principal
  differences between them.

  The great profits upon the Missisippi were expected from the interest
  paid by government for the great loan, the farms of the revenue, and
  the profits upon their trade.

  Those of the South Sea were, at setting out, 1. The profits upon their
  trade: 2. The allowance made them: 3. 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 4. 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
  that 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 the public concerning the
  funds which were to produce this dividend; so every one concluded that
  there were hidden treasures in their hands, which enabled them 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 Missisippi, 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 of want of money; but that 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 much less
  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 they were to purchase in, 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; 1_mo_, From the profits of the trade, which they were to enjoy
  exclusively. And, 2_do_, 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 33⅓ 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 that
  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 have
  informed the public, 1_mo_, Of the money owing to them by government.
  2_do_, Of the money gained by the subscriptions above par. And 3_tio_,
  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.

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 that purpose for a few years only, and not diverted to
other uses, I am persuaded the consequence would be, to reduce interest
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. chap. 4th. But the disaster
which befel 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 that 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 the national debt. 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 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 the 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 money’d men are willing to lend, provided the
loan be made at the then rate of interest.

To avoid therefore the establishment of funds at different rates, in
proportion to the fluctuations of money, the bargain is made at one
determinate interest. Suppose, for an example, 3 _per cent._ Then,
according as it is found to rise above that 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
39⁄97 _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._ 10_s._

This made five thousand annuities on lives, of 4_l._ 10_s._ 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, or 4⅛ _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[26],
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 that way, the lenders were willing that it should be
so; and the difference between 3.87 _per cent._ (the then rate of money)
and 4⅛ interest, which was paid by government, was a sinking fund, as it
were, for the gradual extinction of the capital of the lottery for
500,000_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 4½ _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 4½ _per cent._ there would have been a saving of 600
000_l._ upon the capital; and at the peace, the interest of 4½ _per
cent._ would equally have come down to 3 _per cent._ with the other
funds.

Footnote 26:

  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.

During this first war of George the Second, the land-tax was constantly
at 4_s._ 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 3 005 325_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 31 631 546_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 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 3½ _per cent._
from thence, until the total reduction to _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 might have been so far animated
against the creditors, from the disappointment, 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 ever be 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 consented to 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 them, would undoubtedly then, as at
all times, operate a very great national relief, in bringing down the
interest.

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_[27]. 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;
besides the difference between the unfunded debts at the beginning and
end of the war; and also the value of those annuities[28].

Footnote 27:

  To this funded debt must be added the unfunded debt, which I do not
  know exactly; and the value of the annuities granted in 1745, and
  1746.

Footnote 28:

  The annuities of 1757, are estimated, by the author of the
  Considerations on Trade and the Finances, at 472 500_l._ or at 14
  years purchase; and the annuities of 1761, 1762, at 6 826 875_l._ or
  at 27½ years purchase. But this valuation seems too low, for the
  reasons given in the note, p. 394.

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 a little above 3 _per
cent._ but then a loan of 5 millions being necessary, government
consented to create annuities of 4½ _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.

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 this case, a
course of experience to point out the errors, we must entirely rely upon
our own sagacity, and reason only from analogy.

During the last war, as in that preceeding 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 3_d._ _per_ bushel, and the new
beer-duty of 3_s._ _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, providing 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 inland duties net                                       1 000 000
 Land tax at 4_s._ 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
  2_do_, The interest of about 131
    millions of funded debts at different
    rates of interest, about                   4 500 000
  3_tio_, 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[29]                                                 1 940 000

Footnote 29:

  I find that the sinking fund is now estimated at 2 100 000_l._ by the
  author of the Considerations on Trade, &c. above cited. I am also
  informed that the net produce of the customs exceeds 2 000 000_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.

In that 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 this period,
money was not found to regorge, as after the peace of Aix-la-Chapelle,
so as to furnish an opportunity of reducing the rate of interest upon
all redeemable debts, and by that of raising the amount of the sinking
fund, and more firmly establishing the national credit.

After the fall of the credit of France towards 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 borrowed money.

The consequence was, that no sooner did the funds begin to rise after
the peace, than every creditor demanded his 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.

However great 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 strangers have certainly, upon the whole,
prevented much money from coming home on the general or grand balance of
payments. While that remains the case, it is impossible money should
regorge at home in the hands of the natives, and until this happens,
there is no hope of seeing the 3 _per cents._ above par. But then the
rise, small as it is, since the peace, may encourage us to hope that
that time 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._[30]

Footnote 30:

  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, that
  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 only 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._ 15_s._ 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._ 18_s._ add to this sum what the
  public must pay for the liberty to play, which we have stated above at
  2_l._ 15_s._ and you have the exact par of a lottery ticket at 11_l._
  13_s._

  Whatever they sell at above 11_l._ 13_s._ is profit to the
  subscribers, whatever they sell below 11_l._ 13_s._ 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 6⅔ _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 600 000_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.

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 stock-holders 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.


------------------------------------------------------------------------


                               CHAP. VI.
     _State of the public Credit in France, their Debts, Funds, and
                  Appropriations, at the Peace 1763._


Were it as easy to get information of the political state of France as
of Britain, one might attempt to give such a sketch of their affairs as
we have now done of the other; but when we consider the lame accounts
given by French authors who have made researches of that kind their
particular study, it would be inconsiderate in a stranger ever to
undertake a task so difficult.

In France, the finances are considered as a political arcanum, of great
consequence to the state to conceal from vulgar eyes. It is not long
ago, since the farmers of the greatest part of the revenue used
regularly to burn their books at the end of the year, to prevent the
King’s servants from knowing the state of the most essential part of his
affairs. Cardinal de Fleuri abolished this custom, and obliged them to
lay every thing open to his eyes.

I shall now endeavour to communicate, in as short and distinct a manner
as I can, an idea of the present state of the French revenue; of the
taxes from which it proceeds; of the manner they are administred; of the
purposes to which they are appropriated; and of the state of the King’s
debts at the end of the last war.

From this view we shall form a general notion of their public expences;
of their public debts; and of what is most material, of the resources of
that kingdom in time to come.

For this purpose, I shall divide the whole revenue of France, that is,
all that is raised on the people, to whatever purpose it may be applied,
into five branches; and after having first explained the nature of each,
I shall give a general detail of them in their order.

The first branch is what is called the King’s ordinary revenue. This is
composed of about twelve articles of permanent taxes, supposed to be
sufficient for defraying the whole expence of government, civil and
military, in time of peace.

The second is composed of all the extraordinary impositions which were
laid upon the people, in consequence of debts contracted in the former
war, ended in 1748.

The third, what was imposed during the last war, for the service of the
state, and for paying off the debts then contracted.

The debts of France, contracted in periods anterior to those two wars,
are charged on the ordinary revenue, as we shall presently see.

The fourth branch consists of two articles. The first comprehends
certain perpetual taxes appropriated for certain state expences, not
charged upon the ordinary revenue. The second, what is computed to be
the expence of levying all the taxes, and also the profit of the
farmers: or in other words, what the people pay more than the public
receives from the hands of the tax-gatherers.

The fifth and last branch, comprehends the taxes paid to the court of
Rome, to the clergy, and to the poor; with other duties belonging to
private persons. Under one or other of these five branches, may be very
properly arranged all the taxes paid by the French nation.

                         First general branch.

 The King’s ordinary revenue, with the charges upon it for the year 1761.

     Articles of revenue.          Fr. money.        Sterling ditto.
                                     livres.           l.        s.   d.
 1. Domain (the King’s landed
   estate)                             6 000 000        266 666  13    4
 2. Taille (the land-tax)             56 600 000      2 515 555  11   1¼
 3. Double capitation (the
   poll-tax)                          53 200 000      2 364 444   8  10½
 4. Ditto upon such as have
   civil employments,
   pensions, &c.                       6 700 000        297 777  15   6½
 5. 2s. in the pound on all
   civil employments.                  6 800 000        302 222   4   5¼
 6. The mint, or coinage               2 400 000        106 666  13    4
 7. Decimes and capitation of
   the clergy                         12 400 000        551 111   2   2½
 8. Free gifts from the
   states of Burgundy,
   Provence, Languedoc, and
   Brittany                           10 000 000        444 444   8  10½
 9. Paulette, or annual tax
   upon hereditary offices             2 600 000        115 555  11   1¼
 10. Tax on the Lutheran
   clergy of Alsace                      200 000          8 888  17   9¼
 11. Regale, or the
   sovereign’s right on
   ecclesiastical benefices            1 400 000         62 222   4   5¼
 12. General farms                   112 500 000      5 000 000   —    —
                                     ———————————    ————————————————————
 Total of the ordinary
   revenue                           270 800 000     12 035 555  11 [31]1¼


          Of this total the      livres.        l.     s.  d.
          general farms
          amount to            112 500 000  5 000 000   —   —
          And the other        158 300 000  7 035 555  11  1¼
          branches to


 The farms were increased
   _anno_ 1762 by                      11 500 000      511 111    2   2½
                                      ———————————   ————————————————————
 Total ordinary revenue at the  }
 end of the war                 }     282 300 000   12 546 666   13    4
                                      ———————————   ————————————————————
      Articles of Expence.
 Houshold of the King and royal
   family                               9 400 000      417 777   15   6½
 Ditto, their personal expence          4 600 000      204 444    8  10½
 King’s stables and stud                2 500 000      111 111    2   2½
 Hunting equipages                      1 600 000       71 111    2   2½
 Alms                                     600 000       26 666   13   4
 Pay of the palace guards,
   (_gardes de la porte_) &c.           3 300 000      146 666   13   4
 King’s buildings                       6 600 000      293 333    6   8
                                      ———————————   ————————————————————
 Total expence of the court            28 600 000    1 271 111    2   2
                                      ———————————   ————————————————————
 Pay of all the houshold troops         8 000 000      355 555   11   1¼
 Pay of all the other troops of
   France                              48 000 000    2 133 333    6   8
 Fortifications                         6 000 000      266 666   13   4
 Artillery for land service             6 600 000      293 333    6   8
 Military gratifications, over
   and above the pay                   10 000 000      444 444    8  10½
 Pay of general officers
   commanding in provinces and
   fortresses                           2 000 000       88 888   17   9¼
 Pay, &c. of the marechaussée           2 200 000       97 777   15   6½
 Expence of prisoners of state          1 200 000       53 333    6   8
 Ordinary expence of the navy          25 000 000    1 111 111    2   2½
                                      ———————————   ————————————————————
 Total regular military expence
   by land and sea                    109 000 000    4 844 444    8   10
                                      ———————————   ————————————————————
 Royal pensions                         9 000 000      400 000    —    —
 The appointments of the King’s
   ministers                              310 000       13 777   15   6½
 Ditto of the first presidents
   of all the parliaments in
   France, expence of criminal
   prosecutions, and many other
   articles of that sort               22 000 000      977 777   15   6½
 Appointments of the venal
   employments, of the robe,
   treasurers, receivers,
   comptrollers, &c.                   10 000 000      444 444    8  10½
 Bridges, highways, dykes, &c.          4 000 000      177 777   15   6½
 For the royal academies                1 400 000       62 222    4   5¼
 To the King’s library and
   archives of France                   1 800 000       80 000    —    —
 Extraordinary and casual
   expence upon the two last
   articles                               400 000       17 777   15   6½
 For lighting and cleaning the
   city of Paris                          840 000       37 333    6   8
 Appointments of the secretary
   of the cabinet council, for
   couriers, and other expence          1 400 000       62 222    4   5¼
 Ditto of ministers at foreign
   courts                               1 800 000       80 000    —    —
                                      ———————————   ————————————————————
 Total sum of this branch              52 950 000    2 353 333    6   8
                                      ———————————   ————————————————————
 Interest at 2½ _per cent._
   upon 990 000 000 livres, or
   44 000 000_l._ sterl. of the
   late King’s debts,
   constituted after the
   bankruptcy 1720                     24 750 000    1 100 000    —    —
 Interest at 2½, upon 94
   millions due to the company
   of the Indies, upon their
   old accompts 1720                    2 350 000      104 444    8  10½
 Farther allowed to the
   company, for paying their
   dividends                            2 400 000      106 666   13   4
 Annuities on lives constituted
   during the last war                 16 000 000      711 111    2   2½
                                      ———————————   ————————————————————
 Total interest of debts               45 500 000    2 022 222    4    5
                                      ———————————   ————————————————————

Footnote 31:

  These reductions of French money to sterling, are computed at the rate
  of 22½ livres to the pound sterling. Hence 270 800 000 livres make 12
  035 555_l._ 11_s._ and 1½_d._ sterling, or nearly 1¼_d._ as stated,
  though the amount of the partial sums differs by 1_d._

This article of 16 millions of annuities on lives is the only charge
cast upon the King’s ordinary revenue, in consequence of the last war.

      Articles of revenue.         Fr. money.        Sterling ditto.
                                    livres.            l.        s.   d.
 Recapitulation of the expences.
 Expence of the court                 28 600 000      1 271 111   2   2½
 Fixed military ditto, by sea
   and land                          109 000 000      4 844 444   8  10½
 Justice, pensions, &c.               52 950 000      2 353 333   6   8
 Interest of debts                    45 500 000      2 022 222   4   5¼
                                     ———————————    ————————————————————
 Total expence                       236 050 000     10 491 111   2   2½
 Total ordinary revenue at the
   end of the war                    282 300 000     12 546 666  13   4
                                     ———————————    ————————————————————
 The first deducted from the }
 latter, Remains free        }        46 250 000      2 055 555  11   1½
                                     ———————————    ————————————————————

Besides the articles of expence here stated, there are many others, to
which no limit can be set. The _comptant_, or the King’s private orders
for secret service, and many different expences, form a great article.
Subsidies also to foreign courts: in short, much more, in all human
probability, is spent, than all the produce of this permanent revenue
can answer. So that from this no relief from debts can be expected,
except so far as it may be augmented by the falling in of the annuities
on lives. But public debts are to be paid only by funds appropriated for
that purpose: and were this revenue to be relieved of the whole 45
millions of interest charged upon it, I have little doubt but the King’s
expence would augment in proportion.

I shall delay making any observation upon the nature of the impositions
which produce this revenue, until we come to the subject of taxes, to
which it naturally belongs.

Besides this ordinary revenue of the Kings of France, which (if we
except 26 600 000 livres, or 1 182 222 _l._ 4 _s._ 5¼ _d._ upon the
capitation, added on account of the war only for a time) may be
considered as their civil list; there are other branches of revenue,
which are to be looked on as extraordinary supplies, imposed for raising
money in time of war, and for paying off the debts contracted, upon the
return of peace. Of this nature are _dixiemes_ and _vingtiemes_; taxes
very contrary to the spirit of the French nation, and to which they
never have submitted without the greatest reluctance, and only on very
urgent occasions.

The credit of France fell very low towards the end of the former war,
which began in 1744, and ended in 1748. The parliament registred with
great unwillingness every edict imposing new burthens. The _dixieme_ was
a great augmentation of revenue, for the time it lasted; but being an
imposition which the Kings of France never have been able to make
perpetual, it could not be pledged for such large sums as are required
in time of war, and which no nation, however wealthy, can furnish
annually, as they are demanded.

To supply, therefore, the want of a fund to be mortgaged, and
consequently the want of public credit, the King’s banker M. de
Monmartel, with other men in business, joined their credit, and supplied
the King’s extraordinary occasions. They opened a sort of bank _anno_
1745, where they received money at ½ _per cent._ _per_ month, the
principal payable on demand. This fund gained credit; payments being
regularly made as soon as demanded.

Upon settling accounts after the peace, _anno_ 1748, the King was found
indebted to this bank for a vast sum of money. In order to pay it,
lotteries were set on foot. The tickets were given to the bankers, and
they by the sale of them withdrew their own paper, which was circulating
with very good credit on the exchange of Paris. In order to furnish a
fund for this lottery, the King had interest with the parliament to get
a twentieth penny established, or one shilling in the pound, upon all
the revenues of private people in France, except the clergy, and some
hospitals. The same was charged upon the industry of all corporations of
trades and merchants; and to these was added a capitation upon the Jews.

This was thrown into what they call the _caisse d’amortissement_, or
sinking fund; and appropriated for paying off the lotteries, and some of
the antient debts which were to be drawn, for this purpose, by lot; and
for other extraordinary expences incurred in consequence of the war.
This tax was to subsist, I believe, till 1767. It was this _caisse
d’amortissement_ which was shut up in 1759, by which step a mortal blow
was given to French credit.

Besides this first twentieth penny, there were five other taxes imposed,
and appropriated during a determinate number of years, not exceeding 15
in some, 12 in others, for paying off the debts contracted in the war
ended 1748, and for some extraordinary expences of government.

These shall be specified in the following general view of this branch of
the French revenue.

                         Second general branch.

Extraordinary taxes established after the peace of Aix-la-Chapelle, with
their appropriations.

      Articles of revenue.         Fr. money.        Sterling ditto.
                                    livres.            l.        s.   d.
 The first twentieth penny on
   all income                         23 800 000      1 057 777  15   6½
 Ditto upon tradesmen and
   merchants incorporated              6 500 000        288 888  17   9¼
 Ditto upon the Jews                   1 400 000         62 222   4   5¼
                                      ——————————               —————————
 Total of the twentieth penny,
   which formed a sinking fund,
   shut up in 1759                    31 700 000      1 408 888  17   9¼
 The farm of the posts and
   _relais_ of France                  6 000 000        266 666  13    4
 Two shillings in the pound of
   the capitation added to it          5 520 000        245 333   6    8
 The farm of stamp-duties on
   leather, and duties on
   tanners bark                        2 960 000        131 555  11   1¼
 The farm of duties upon
   gunpowder and saltpetre             2 988 000        132 800   —    —
 Two shillings in the pound of
   the twentieth penny added           3 170 000        140 888  17   9¼
 Total of this second branch
   of                        }
 French taxes                }        52 338 000      2 326 133   6    8
                                      ——————————               —————————
 Appropriations of this fund, as follows:
 1. For paying, during 10
   years, a part of the 990
   millions, of livres, of old
   Annuities, charged above on
   the King’s ordinary revenue,
   and bearing an interest of
   2½ _per cent._ the yearly
   sum of                              5 000 000        222 222   4   5¼
 2. To the India Company, in
   discharge of a debt due to
   them: for 12 years                  2 000 000         88 888  17   9¼
 3. For paying the prizes of
   the bankers lotteries every
   year as they are drawn: for
   12 years                            3 800 000        168 888  17   9¼
 4. Towards making good
   deficiencies upon the funds
   appropriated for the war,
   yearly, till paid                  18 700 000        831 111   2   2½
 5. Ditto upon the funds
   appropriated to the new
   _Ecole militaire_                   1 200 000         53 333   6    8
 6. For payment of perpetual
   annuities created during
   last war                           14 500 000        644 444   8  10½
 7. For making good
   deficiencies upon the
   artillery and magazines,
   during the war 1744: for 12
   years, the annual sum of            1 800 000         80 000   —    —
 8. Ditto upon the article of
   foreign affairs                     8 690 000        386 222   4   5¼
 Total appropriation                  55 690 000      2 475 111   2   2½
                                      ——————————        ————————————————

This branch of revenue appears, by this state, to be totally
appropriated to certain purposes.

Were appropriations adhered to in France, and could one be certain that
debts are actually discharged, at the period appointed, in consequence
of the appropriation for that purpose, we might form a better judgment
of the _actual_ amount of the debts of France, than in fact any man can
do who is not in the administration.

Of this second branch of taxes I consider the twentieth penny, the two
shillings in the pound augmentation upon it, and a like augmentation
upon the double capitation; amounting in all to above 40 millions a
year, as a resource which France may have at all times, in cases of
necessity; although I do not suppose it will be possible to establish
them as a fixed revenue. They will probably, however, as matters stand,
be continued, either in whole or in part, until the great load of debts,
recently contracted, shall be considerably diminished.

As for the remaining sum, arising from the posts, leather, and
saltpetre, these I consider as perpetual; because by their nature they
are not burdensome to the people.

We are not to understand that the annual sum of five millions of livres,
appropriated for paying off the capital of 990 millions of the old
annuities, bearing 2½ _per cent._ stated in art. 1st, was intended to be
applied to these capitals, at the rate they stand. In France it is
supposed that he who gets 20 years purchase of the interest of his debt,
is always fairly paid off; and people there are so fond of
reimbursements, even at this rate of making them, that when, about the
year 1755, a like scheme of paying off those old annuities was
suggested, it was upon condition that every one having, for instance, an
annuity of 100 livres, should, in order to be intitled to this
reimbursement, pay to the King 20 years purchase of it, or 2000 livres
ready money; and that being complied with, his contract was to be put
into the lottery wheel, with all the rest subscribed for, and if it
happened to be drawn, he was to receive 4000 livres; to wit, the 2000 he
had paid down, and the other 2000 as the value of a capital of 4000
livres, at 2½ _per cent._

This every body must allow procures a wonderful facility in paying off
debts. If the English creditors could be engaged to enter into the
spirit of such reimbursements, government, I am persuaded, would not
apply so closely as they do, to reduce the interest upon them; whereby a
great distress comes upon poor widows and orphans, who have their all
vested in the funds. This inconvenience is avoided in France: the poor
are cherished by the comfort of high interest; the state is set free;
and the creditors rejoice in getting back their money, in any shape
whatever.

The war of 1756 breaking out, obliged the King to think of every
expedient to increase his income. Had he set out by borrowing upon
annuities for lives, at 10 _per cent._ and by mortgaging his ordinary
revenue for the payment of them, his credit would have been more solid,
and the plan of running in debt more systematical: but in the end, it
would have involved him in the terrible dilemma of either making a
bankruptcy, in order to re-instate himself in the possession of his
ordinary revenue, or of making him depend more than he inclined upon his
parliament; whose authority is absolutely necessary for laying a
perpetual and regular imposition, which alone can form a solid basis of
national credit.

He was therefore resolved, in one way or other, to increase the
impositions on the people in the time of war, in order to avoid the
consequences he foresaw from the loss of his fixed revenue.

The King’s ministers at this time could not convince the parliament of
Paris, that in order to borrow money upon the best terms, it was
necessary to have a sure fund for paying the interest of it.

It had been usual to borrow money, on pressing occasions, from the
farmers of the revenue, bankers, and financiers, as they are called, at
7 and even 10 _per cent._ They understanding the chain of the affairs of
France, used to obtain credit both abroad and at home, from people who
would not lend directly to the King; although they knew at the time of
the loan that the money was borrowed for his use. The reason was, that
the King was under an absolute necessity to keep faith with this set of
men, upon whom the credit of France has depended for many ages: and as
the profits they used to make were very great, ministers knew, by a sort
of instinct, when they had gained enough; and in clearing their accounts
in the usual way, a sufficiency was left to them, to repay what they had
borrowed from others.

Perhaps the parliament thought, and perhaps with reason, that in the
main it was cheaper to borrow in this way, at 10 _per cent._ than in the
English way, at 3 _per cent._ because of the great facility in paying
off the debts which attended it; but this is only a conjecture. That
there was however a contrast of sentiments between the parliament, and
the minister of the finances at that time, who had contracted English
ideas of credit, is most undoubted; and it was this contrast which
brought on the bankruptcy in 1759, when the sinking fund was shut up
against the creditors by an act of power. To judge of the sentiments of
both parties with candour, let us then examine the plan of borrowing
proposed by the one, and by the other.

The minister, M. de Silhouëtte, proposed to the King, to levy, as a
solid fund of credit to borrow upon, a general subvention, as it was
called, over all France; or in other words, to make the repartition of a
large annual payment, over all the cities, towns, villages, and suburbs
in France.

This was to be divided according to the supposed wealth and quantity of
circulation every where. Every district was ordered to report to the
King’s council their opinion concerning the particular mode of raising
their proportional part of it, in the best way relative to their
situation. This report the council was to examine, and to approve or
amend the proposal given in, according to information.

This was perhaps the best plan of taxation, if properly executed, that
ever has been thought of, for a nation already under a regular
administration of government, and accustomed to pay considerable
impositions.

It removes the inconvenience attending all general taxes, which never
fail to affect unequally different places and districts. It admits of a
prudent mixture of excises, with taxes upon possessions, according to
the internal circumstances of every place. It confines them to towns,
where alone all excises at least can be levied with propriety. It
lightens the oppression of tax-gatherers; because the corporation may
employ whom they will for that purpose. In a word, it is a tax
administred with all the advantages of a farm.

This tax, the general subvention, after it had been imposed by edict,
registred in a Bed of justice September 1759, fell to the ground, from
the nature of the French constitution; because it could not be levied
without a systematic administration, supported by the authority of the
courts of law, to which the parliament would not give their concurrence,
for a very plain reason.

The general subvention being very extensive, and calculated for a fund
of credit to borrow upon, was, by its nature, of a species proper to
become a perpetual tax, as all excises are. The parliament of Paris
seemed to think it agreeable to the constitution, which they are sworn
to maintain, to preserve at all times in their hands a certain power
over the King’s purse, in order to prevent an extravagant minister from
impoverishing the King and the kingdom at once, or running them into the
inextricable confusion of an infallible bankruptcy.

This circumspection of the parliament was represented in another light
at court; and odious parallels were drawn between what had happened in
England about the middle of the last century, and what soon might be
expected in France.

Upon such topics every one judges as he is affected. The minister was
railed at by the parliament-party, in the most virulent manner. Who was
in the right, and who was in the wrong, upon the general question, of
the propriety of raising so large an imposition, to serve as a fund of
credit, under a government like that of France, I shall not here
examine. But that a solid fund should be provided, in one way or other,
proportional to the actual deficiency of the annual supplies, and to
what could not be raised within the year, for the uses of the war, was,
I think, entirely agreeable to principles.

This the minister had proposed in the subvention, though perhaps the
plan was too great; and the parliament, when they rejected the proposal,
sensible that the exigencies of the state demanded a supply of money,
proposed in their turn, as an equivalent for the general subvention, to
coin for 600 millions of notes, which were to have the sanction of
parliament for their fund of payment; but no provision was made for the
ready circulation of them in the interim.

Here then is an example where the sentiments of the French nation were
divided upon the principles of public credit. And this affords a good
opportunity of reconciling them, and of confirming the doctrine we have
been endeavouring to establish.

The minister felt the disadvantage of the King’s borrowing upon a lame
security; he therefore proposed a solid and permanent fund of credit for
performing the obligations to be contracted with the creditors.

The parliament, on the other hand, examined the situation of the people,
who, they thought, were no longer in a capacity to pay the taxes already
imposed; and therefore concluded, that it was unnecessary to establish
any new one. They therefore proposed to augment circulation, by
providing a means whereby alienations might be carried on, and by that
they expected to render the taxes already imposed more productive.

Both parties were in the right, as commonly is the case in such
disputes; but they did not perceive how their opinions could be
reconciled.

Had circulation been facilitated by the establishment of a bank upon
true principles, perhaps the taxes already imposed, might have produced
a sufficient fund for carrying on the war, without the expedient of the
general subvention.

But the manner proposed by the parliament to increase circulation, by
paying with paper money, and not providing a fund for realizing it when
it came to stagnate, was an expedient entirely delusive. The paper would
soon have fallen to a great discount: the remembrance of the Missisippi
would probably have been revived, which would have occasioned the
locking up of the coin; and the kingdom might have been involved in the
greatest distress and bankruptcy.

The minister should therefore have concurred with the parliament in a
scheme for establishing a bank: the King might safely have entrusted the
administration of it to parliament, and even have supplied coin from the
royal treasury for circulating the paper. But the minister, I suppose,
took it for granted, that taxes _would_ be paid, providing they were
imposed; and the parliament, that the paper _would_ circulate, providing
it was issued.

The reasonings I have ascribed to each party in this dispute, are not
founded upon information: they are only natural conjectures which I form
from the opposition of sentiments between men who were all, I suppose,
well acquainted with the situation of France, and who respectively took
part according to the combinations which occurred to them.

The remonstrances of the parliament at that time were filled with an
enumeration of distresses, all of which are the necessary effects of a
scanty circulation. In the King’s edicts there is strong reasoning upon
the principles of public credit. The candour I feel in my breast, while
I examine the merits of this important dispute, will I hope serve as an
apology for all mistakes in point of exact information.

The result upon the whole was what might have been expected. The
subvention was dropt, and the proposal of the paper was rejected by the
King.

The middle term adopted by the parties, shewed however, I think, that in
the main the minister had been in the right; because the taxes were
increased and paid: had the paper been issued, the success, I am
persuaded, would not have been favourable in proportion.

But instead of a permanent subvention, a tax of the most odious nature
was established, which, from this very circumstance, there was little
danger of seeing long continued.

In the preceeding year, a second twentieth penny upon possessions had
been imposed, to which had been added 2 shillings in the pound of the
tax itself; a new poll-tax upon certain classes of the people in
proportion to the number of their servants; an additional duty upon the
stamps upon silver and gold plate; higher duties on foreign manufactures
imported; and 20 _per cent._ on all former duties on consumption. The
second twentieth was to continue until two years after the peace; the
other duties for eight years longer.

Notwithstanding this heavy load already laid upon property, the
parliament, rather than consent to the subvention, agreed to impose a
third twentieth penny upon possessions; and to render this tax more
productive, additional poll-taxes upon place-men, &c. were comprehended
in that edict. Thus ended the dispute: the minister was dismissed, and
the edict for the general subvention was withdrawn.

Besides the second and third twentieth penny, several augmentations of
revenue were obtained during the last war, which I shall presently
mention, two of which, for their peculiarity, I shall briefly explain.

The clergy of France, strongly pressed by the King, supported by his
parliaments, to give in a declaration of their income, in order to be
taxed at so many shillings in the pound, like other subjects, after many
evasions, at last succeeded in disappointing the scheme. They offered an
extraordinary free gift equivalent to the two twentieths, to be paid
annually until 1765, and this was accepted.

The ordinary free gift of the clergy is at the rate of a million and a
half of livres a year; this they doubled and paid at the rate of three
millions a year, which we may consider as two shillings in the pound of
all the clergy possess in France, which makes their revenue to be about
thirty millions a year, and I believe it does not far exceed it.

The other branch of revenue is something analogous to a circumstance in
the history of English taxes: it was called an extraordinary free gift
to be paid by every corporation in France. Charles I. had a very exact
valuation put upon all England, when he proposed to levy ship-money.
This was found so correct that it served for a basis to regulate the
distribution of the sum of 100 000_l._ a year paid to Charles II. for
his courts of wards and liveries[32].

Footnote 32:

  Davenant’s Ways and Means, Article of Monthly Assessments.

In like manner the King of France had a very accurate estimate made of
all France, when he formed his edict for a general subvention, which had
pretty much the fate of the ship-money. And though the parliament
refused their consent to the great subvention, they agreed to establish
the epitome of it in August 1759: which see in the note[33].

Footnote 33:

  This free gift was imposed upon all cities, towns, buroughs, villages,
  and suburbs, in France. And those lying within the jurisdiction of
  every Intendant were joined in one sum, leaving the repartition of
  them to those magistrates, as the custom is.

 For the generality of Amiens                  153 300
 For the generality of Orleans                 356 000
 For the generality of Paris                 1 578 000
 For the generality of Chalons                 200 900
 For the generality of Poitiers                265 200
 For the generality of Soissons                 60 700
 For the generality of Tours                    34 434
 For the generality of Rochelle                131 800
 For the generality of Bourges                 105 600
 For the generality of Moulin                   91 770
 For the generality of Riom                    165 628
 For the generality of Lyons                   397 454
 For the generality of Artois                  150 000
                                               ———————    Sterling.
 Sum total                                   3 690 786   £164 034 18 8

  The duties imposed by this arret are to be levied upon all classes of
  the people, nobility, commons, clergy, even nuns and monks; no
  exception is made except in favour of hospitals for their own
  consumption only.

This tax, small as it is, may be of infinite consequence in times to
come. The great difficulty of raising taxes is in the beginning; and if
the levying of this trifle in every city, town, village, and suburb, in
France, be carefully conducted, with a view to subsequent augmentations,
and if it be properly distributed upon every branch of consumption and
revenue, nothing will be so easy to the King as, by his own private
authority, to enforce a gradual augmentation of it, and perhaps in time
to absorb in it, the whole, or at least the greatest part of the revenue
of his kingdom.

Besides the two twentieths, and the free gift of the cities, several
other taxes of less moment were either imposed, renewed, or continued
for a longer term, and then sold for raising money for the service of
the year, viz.

1_mo_, Five years of the free gift of the clergy of France, amounting to
15 millions, were paid down at once by that body.

2_do_, That of the clergy of Alsace, paid in the same way, for the same
term, produced 3 millions.

3_tio_, A duty on firewood, &c. in the city of Paris, valued at 3 400
000 a year, sold for 7 years, for 10 millions.

4_to_, Another duty upon the consumption of eggs, butter, &c. valued at
2 400 000, sold for 15 years for above 30 millions.

5_to_, A like sum got from the farmers general, for allowing them to
raise the price of their tobacco 10 _per cent._ for 10 years. The annual
amount of this I do not know.

6_to_, And in the last place, the third twentieth penny, which produced
36 270 000 a year, was sold for the two years for which it was imposed,
for 60 millions.

Thus, of all the impositions raised during the last war, the second
twentieth, and an epitome of the subvention raised in all cities, towns,
villages, and suburbs, in France, remain unalienated.

In order to throw all the light I possibly can upon the present state of
that nation, I shall next briefly recapitulate the extent of the annual
supplies raised for the service of the different years of the war, from
1756 to 1762 inclusive; in which I shall point out, as well as I can,
how this third branch of revenue was appropriated.

It is in this manner only I can communicate to the reader what I can
guess concerning the present state of that nation. Could we know, as
with us, the amount of taxes, and outstanding debts at every period,
that detail would be unnecessary.

The extraordinary grants of 1756, amounted to 121 millions, 5 377
777_l._ sterling.

In October 1755, the farms of almost all the taxes were renewed. Upon
such occasions, it is usual for the farmers to advance sums in
proportion to the extent of their farms, for security of the lease; for
which advances the King, at that time, allowed them an interest out of
their yearly farm-rent of 5 _per cent._ and the sums advanced were
appropriated for the service of the year 1756. Here follow the sums
advanced upon the several farms.

                                     Fr. money.      Sterling ditto.
                                      livres.          l.       s.   d.
 1. Upon the general farms,
   after repaying what had been
   advanced upon the former
   lease, nett into the royal
   treasure                            40 000 000    1 777 777   15   6½
 2. Upon the farm of the posts
   of France                            3 000 000      133 333    6    8
 3. Upon the farm of the stamps
   upon leather                         1 000 000       44 444    8  10½
 4. Upon the farm of the
   _paulette_                           1 000 000       44 444    8  10½
 5. Upon the farm of duties on
   gun-powder and salt-petre            1 000 000       44 444    8  10½
 6. The farm of the market of
   Poissi was sold for seven
   years, for                          15 000 000      666 666   13    4

 This sum was the price of the
   total alienation of the
   duties collected in that
   market for the whole time;
   which duties should be
   marked as a branch of
   revenue; but as the annual
   amount of them cannot be
   ascertained, it is here
   thrown in as an
   extraordinary means of
   supply arising from the sale
   of a tax.
 7. Besides those casual supplies
   from the new farms, there was
   levied this year, for the sale
   of five years revenue of the
   free gift of the clergy of
   France, to 1761 exclusive           15 000 000      666 666   13    4
 8. And for that of Alsace              3 000 000      133 333    6    8
 9. Raised by a lottery, for which
   the annual sum of 3 800 000 was
   set apart for 11 years              32 000 000    1 422 222    4   5¼
 10. And for the sale of the
   duties upon firewood, &c. in
   Paris, for 7 years                  10 000 000      444 444    8  10½
                                     ————————————    ———————————————————
 Total extraordinary supplies   }
   for 1756                           121 000 000    5 377 777   15   5¾

 The supplies for 1757, amounted
   to 136 millions, £6 044 444
   sterl.
 1. Two lotteries, for which
   were appropriated, for the
   first, 3 800 000 during 12
   years; and for the second, 4
   000 000 during 11 years.
   These sums were annually to
   be drawn, and paid every
   year; for which was paid to
   the King, for the first, 36
   millions; for the second, 40
   millions; together                  76 000 000    3 377 777   15   6½
 2. The ordinary revenue was
   charged with 6 millions of
   life annuities, at 10 _per
   cent._ sold for                     60 000 000    2 666 666   13    4
                                     ————————————    ———————————————————
                                      136 000 000    6 044 444    8  10½

 The supplies for 1758, amounted
   to 135 millions, £6 000 000
   sterl.
 1. The first was a loan of 40
   millions, upon a perpetual
   annuity of 5 _per cent._
   proposed to be paid off by way
   of lottery, at the rate of 3
   200 000 yearly — —                  40 000 000    1 777 777   15   6½
 2. The King obliged those who
   have hereditary offices
   proportionally to purchase
   additional salaries, to the
   extent of 1 million a year,
   at the rate of 20 years
   purchase, or forfeit what
   they had                            20 000 000      888 888   17   9¼
 3. The additional 10 _per
   cent._ upon the price of
   tobacco, was sold this year
   to the farmers, for                 30 000 000    1 333 333    6    8
 4. The ordinary revenue was
   charged with 3 600 000
   livres, life-annuities, upon
   two lives, at 8 _per cent._;
   sold for the sum of                 45 000 000    2 000 000    —    —
                                     ————————————    ———————————————————
                                      135 000 000    5 999 999   19  11¾

 The supplies for 1759, amounted
   to upwards of 194 millions, £8
   652 923 sterl.
 1. The first supply for this
   year was the epitome of the
   general subvention, called
   an extraordinary free gift
   from all the cities, towns,
   burgs, villages, and suburbs
   in France                            3 690 786      164 034   18    8
 2. 3 600 000 livres of
   perpetual annuities,
   borrowed upon the general
   farms, at 5 _per cent._
   until reimbursement, sold
   for                                 72 000 000    3 200 000    —    —
 These are called the contracts
   upon the farms; each one
   thousand livres capital.
 3. The free gift of the
   clergy, for five years from
   1761 inclusive, sold at once
   for                                 16 000 000      711 111    2   2½
 4. The second twentieth penny
   produced for this year              35 000 000    1 555 555   11   1¼
 5. Sold to the magistrates and
   heads of colleges in some
   towns in Flanders, some
   branches of their own taxes,
   for                                  8 000 000      355 555   11   1¼
 6. The ordinary revenue was
   charged with 3 millions of
   annuities, called
   _tontines_, sold for                60 000 000    2 666 666   13    4
                                     ————————————    ———————————————————
                                      194 690 786    8 652 923   16    5

 The supplies for 1760,
   amounted to above 251
   millions, £ 11 186 430
   sterling.
 1. The Paris-duties above
   mentioned sold for 15 years         30 283 900    1 345 951    2   2½
 2. The 3d shilling in the
   pound sold for two years,
   for                                 72 340 000    3 215 111    2   2½
 3. The 2d shilling produced
   this year                           35 000 000    1 555 555   11   1¼
 4. Raised by perpetual
   annuities, at 3 _per cent._
   secured on the King’s
   ordinary revenue[34]                60 000 000    2 666 666   13    4
 5. The free gift of the
   cities, &c.                          3 690 787      164 034   19   6½
 6. By a lottery at 5 _per cent._
   where the discredited paper
   (the payment of which was
   stopt, when the sinking fund
   was shut up in 1759) was taken
   in payment for one half, was
   raised                              50 000 000    2 222 222    4   5¼
   7. Borrowed from the officers of the town-house of Paris, at 5 _per
                                 cent._
 secured on the ordinary revenue          380 000       16 888   17   9¼
                                     ————————————    ———————————————————
                                      251 694 687   11 186 430   10   7¼

 The supplies for 1761, exceeded
   120 millions, £5 364 034 sterl.
 1. Charged upon the ordinary
   revenue, 200 000 livres a
   year upon lives and other
   annuities, at 10 _per cent._
   in favour of the order of
   the Holy Ghost, sold for             2 000 000       88 888   17   9¼
 2. Borrowed on the duties upon
   leather, at 3 _per cent._           30 000 000    1 333 333    6    8

 These were the annuities which
   were ordered to be reimbursed
   after the peace of 1763, at 20
   years purchase; and which, I
   suppose, had been subscribed
   for, partly, in discredited
   paper.
 3. Charged on the ordinary
   revenue, 4 millions a year,
   for annuities at 8 _per
   cent._ upon two lives, sold
   for                                 50 000 000    2 222 222    4   5¼
                                       ——————————    ———————————————————
                                       82 000 000    3 644 444    8  10½
 4. Besides these sums, there
   was the amount of the 2d
   twentieth, and the small
   subvention, or free gift,
   which continued to be
   applied to the current
   service, as they had not
   been sold off; _inde_               38 690 787    1 719 590   10    8
                                     ————————————    ———————————————————
 Total                                120 690 787    5 364 034   19   6½

 The supplies for 1762,
   exceeded 159 millions, £7
   076 923 sterl.
 1. The farms which had been
   lett in 1755, came to be
   again renewed this year;
   from which arose a sum for
   the security of them, of            83 200 000    3 697 777   15   6½
 2. There was no borrowing this
   last year of the war. The
   second twentieth, which
   never had been sold; the
   third twentieth, which this
   year became free, as it was
   imposed a-new for two years
   more; and the little free
   gift by all the towns of
   France; made together an
   additional sum of                   76 030 787    3 379 146    1   9¼
                                     ————————————    ———————————————————
                                      159 230 787    7 076 923   17   4¾
                                     ————————————    ———————————————————

Footnote 34:

  When the bad consequences of shutting up the sinking fund were
  discovered, the King opened subscriptions, such as were the _tontines_
  of the last year, this of 60 millions, and one the next year of 30
  millions; in which the discredited paper was received, in part payment
  of the sum. This I suppose is the reason why the supplies of 1759 and
  1760 appear so high, and also why money appears to have been borrowed
  at so low a rate as 5 _per cent._ upon tontines, and 3 _per cent._ on
  article 4th of this year; because the interest of that part only which
  was paid in specie is stated; not the interest upon the discredited
  paper subscribed, which was paid out of the first twentieth.

Recapitulation of the expence of the seven years of the war.[35]

                                        Fr. money.     Sterl. ditto.
                                          livres.           l.
  For 1756                                121 000 000       5 377 778
  For 1757                                136 000 000       6 044 444
  For 1758                                135 000 000       6 000 000
  For 1759                                194 690 786       8 652 924
  For 1760                                251 694 687      11 186 431
  For 1761                                120 690 787       5 364 034
  For 1762                                159 230 787       7 076 924
                                         ————————————     ———————————
                 Total                  1 118 307 047      49 702 535
                                         ————————————     ———————————

Footnote 35:

  The Sterling money, in this recapitulation, is reduced to the nearest
  integer, neglecting fractions of a pound.

Having gathered together, from the best information I can, the amount of
all the extraordinary supplies raised in France, for the service of the
last war, let us suppose, that at the peace, no part of any capitals
borrowed had been paid off, according to the plan laid down for that
purpose at the time of contracting. Let us suppose, I say, that all the
lottery funds and life-annuities, as well as those annuities which were
intended to be paid off by way of lottery, stood at their full extent,
without diminution, at the peace, and then calculate what sum of debt
should have remained upon France in consequence of the war.

As for the sums raised, either upon renewing the farms of the revenue,
the amount of new taxes imposed, or such branches of them as were sold
at once for a sum of money, they remain no debt upon the King; and are
therefore to be considered (as they really were) extraordinary resources
drawn from the people, without any recourse to credit or borrowing.

                                     Fr. money.      Sterling ditto.
                                      livres.          l.       s.   d.
 These sums collected from the
   above supplies, and laid
   together, amount to                520 926 948   23 152 308   16    —
                                     ————————————    ———————————————————
 Let us then state the whole of
   the supplies as above            1 118 307 047   49 702 535    —    —

 And from thence deduct the
   extraordinary resources
   drawn from the people, as
   above, to wit                      520 926 947   23 152 308   16    —
                                     ————————————    ———————————————————

 There will remain a capital of }
 borrowed money                 }     597 380 100   26 550 226    4    —
                                     ————————————    ———————————————————
 Of this the life-annuities
   (charged upon the ordinary
   revenue) form a capital of         217 000 000    9 644 444    8  10½

 The lotteries form a capital
   of                                 108 000 000    4 800 000    —    —
 And the perpetual annuities, a
   capital of                         272 380 100   12 105 781   15   6½
                                     ————————————    ———————————————————
 In all, as above                     597 380 100   26 550 226    4    5
                                     ————————————    ———————————————————

Let us next see the amount of annual payments for discharging either the
capital or the interest.

                                     Fr. money.      Sterling ditto.
                                      livres.          l.       s.   d.
 For the life-annuities until
   extinguished, paid out of
   the ordinary revenue                16 200 000      720 000    —    —

 To discharge the lottery fund,
   in 12 years at most                 11 600 000      515 555   11   1¼

 Suppose the perpetual
   annuities all at 5 _per
   cent._; _inde_                      13 619 000      605 288   17   9¼
                                     ————————————    ———————————————————
 Annual sum of interest                41 419 000    1 840 844    8  10½
                                     ————————————    ———————————————————


Let me now draw up a state of the taxes raised for defraying the
expences of this war. In that I shall only comprehend such articles as
existed at the peace, unsold: as for the other, we may consider them
only as expedients for raising money for the current service; but which,
in time to come, may serve to augment the revenue.

                         Third general branch.

                                     Fr. money.      Sterling ditto.
                                      livres.          l.       s.   d.

 1. The 2d twentieth, never
   alienated                           35 000 000    1 555 555   11   1¼

 2. The 3d twentieth, imposed
   for the years 1762 and 1763,
   not alienated                       30 000 000    1 333 333    6    8

 3. The free gift of the
   cities, towns, &c. never
   alienated                            3 690 786      164 034   18    8
                                     ————————————    ———————————————————
                                       68 690 787    3 052 923   16   5¼
                                     ————————————    ———————————————————


Let me now proceed to the fourth general branch of taxes, or of money
raised upon the people of France: 1_mo_, To the profit of the farmers:
2_do_, Towards defraying the expence of collecting the three foregoing
branches of revenue, which amount to about 403 millions: And 3_tio_, To
pay what is appropriated to certain purposes within the country, here to
be specified.

                         Fourth general branch.

                                     Fr. money.      Sterling ditto.
                                      livres.          l.       s.   d.
 1. First then, the net profits
   of all the farmers of the
   revenue are calculated to
   amount to about                     17 240 000      766 222    4   5¼
 2. The expence of levying all
   the revenue is calculated to
   amount to about 10 _per
   cent._ of the whole; _inde_         40 300 000    1 791 111    2   2½
 3. There is a revenue
   appropriated for keeping up
   the water-works at all the
   royal palaces                        1 200 000       53 333    6    8
 And to the invalids, St. Cir,
   and the _hotel militaire_            7 300 000      324 444    8  10½
 There are taxes imposed for
   clothing the militia, to the
   amount of                            3 800 000      168 888   17   9¼
 All the towns in France have
   particular branches of taxes
   appropriated to themselves,
   for pavement, buildings, &c.
   and for maintaining the
   police; which amounts to            15 000 000      666 666   13    4
 And the duties levied in the
   courts of law for sentence
   money, emoluments to the
   judges (_epices_), and
   expence of registrations,
   the vast sum of                     27 000 000    1 200 000    —    —
                                     ————————————    ———————————————————
                                      111 840 000    4 970 666   13   3½

Formerly, all the officers of the courts of justice had salaries paid
out of the King’s revenue. These were insensibly diminished in every
reign, and those court-fees were augmented in order to fill up the void;
from which the greatest oppression ensues.

If to the sum in this last article we add 22 millions above stated as a
charge upon the ordinary revenue for salaries to first presidents, &c.
and other expences of the law, we shall find that the article of justice
alone costs near 50 millions of livres, a year, to the public. The
greatest part of this sum should be considered as the interest of money
borrowed by the Kings of France, the capitals whereof are still
outstanding; and if the capitals were paid off, a great augmentation of
income would arise from it. But the bad footing upon which their credit
stands, renders even this burden expedient on some occasions; because
the King can oblige all those who have such hereditary offices, to lend
money upon an augmentation of their salaries.

To conclude this enormous catalogue of taxes paid by the kingdom of
France, we must not omit the last branch, which comprehends the heads
following:

                         Fifth general branch.

                                     Fr. money.      Sterling ditto.
                                      livres.          l.       s.   d.
 1. What is paid for bulls,
   dispensations, baptisms and
   burials, to the pope,
   bishops, and inferior
   clergy, very near                   10 000 000      444 444    8  10½
 2. For the support of
   hospitals, a sort of poors
   rates                               11 500 000      511 111    2   2½
 3. To branches of impositions,
   of various kinds, belonging
   to private people, peers of
   France, governors of
   provinces, and officers of
   all the royal jurisdictions
   within the kingdom                  20 000 000      888 888   17   9¼
                                     ————————————    ———————————————————
                                       41 500 000    1 844 444    8  10¼
                                     ————————————    ———————————————————

General recapitulation of all the money raised in France by public
authority, for whatever purpose employed.

                                    Fr. money.      Sterling ditto.
                                     livres.          l.       s.   d.
 1. The King’s ordinary
   revenue as it stood at the
   peace 1762                        282 300 000   12 546 666   13    4

 2. The extraordinary revenue
   raised at the peace 1748           52 338 000    2 326 133    6    8

 3. The extraordinary revenue
   raised on account of last
   war, and for the payment of
   debts then contracted, not
   sold at the peace                  68 690 787    3 052 923   17    4

 4. The expence of raising the
   taxes, and emoluments of
   the farmers, with other
   branches perpetually
   appropriated for defraying
   regular expences                  111 840 000    4 970 666   13    4

 5. Taxes paid to the church,
   poor, and private persons          41 500 000    1 844 444    8  10½
                                    ————————————    ———————————————————
 Sum total raised annually in
   France                            556 668 787   24 740 834   19   6½
                                    ————————————    ———————————————————

 Charges, or appropriations of it.

 1. Charges upon the ordinary
   revenue _per_ list above          236 050 000   10 491 111    2   2½

 2. Ditto upon the second
   general branch _per_ ditto         55 690 000    2 475 111    2   2½

 3. Ditto upon the third
   general branch for
   lotteries and perpetual
   annuities constituted
   during the war: the
   life-annuities being
   already charged in article
   1st                                25 219 000    1 120 844    8  10½

 4. Ditto upon the fourth
   general branch totally
   exhausted _inde_                  111 840 000    4 970 666   13    4

 5. Ditto upon the fifth
   general branch ditto               41 500 000    1 844 444    8   10

 There remains
   (unappropriated)   for all
   extraordinary expences of
   state, which compleats the
   sum   total of what is
   raised in France                   86 369 787    3 838 657    4    —
                                    ————————————    ———————————————————
                                     556 668 787   24 740 834   19    6
                                    ————————————    ———————————————————

In this light does the state of the French affairs appear, from the
sketch I have been able to give of it.

Had the sum of 86 millions, remaining as unappropriated at the peace,
been any way sufficient for paying off claims which have not appeared
upon the state we have given, and for all extraordinary expences, the
credit of France would not have been so low as it then was, and still
continues to be.

The expence of a kingdom must constantly exceed the amount of all
regular and permanent income.

At the end of a war what great sums of debts unprovided for are
constantly found! Taxes also, when stretched as they were, and imposed
in so great a proportion upon possessions, in respect of what was raised
upon consumption, must always diminish in their produce; but the expence
and charges never fall short. This is more especially the case in a
country where paper credit is not established.

The constant complaints for want of money to carry on circulation in the
time of war, is a proof of it. When peace returns, and money is kept at
home, then all taxes are readily paid in France, and half the burden of
them is not felt, although they be more productive than before.

As I said in setting out, I do not pretend that the account I have given
of this dark affair, is in any degree so correct as to satisfy a French
minister; but it is a rough sketch, which contains the general state of
their affairs; and if it be worth any man’s while, who is better
informed, he may correct it, and thereby bring on a farther inquiry into
the true state of the question.

What interest a nation, which is not in an actual state of bankruptcy,
can have in concealing its affairs, I cannot find out. How much more
then is it not the interest of a mighty kingdom, which possesses such
amazing resources, to expose its situation in a fair light to the world,
to which it must, upon all occasions, have recourse for assistance in
point of credit?

Of the many branches which compose this great national revenue of above
550 millions, there are several articles which must of necessity be cut
off, so soon as the debts are brought into a regular form. The double
poll-tax is most oppressive on the poorer sort, and therefore was
imposed only for a time: the three twentieths, as they are levied, are
no less so upon the higher classes of the people.

These four articles amount, however, to 116 millions. If we deduct this
from the revenue, as we have stated the account of it, it will not only
exhaust the balance of 86 millions, but it will create a deficiency,
upon the whole, of 30 millions, which can only be compensated by
discharging a corresponding part of the burden of debts, while those
branches do subsist.

But then the same resources are open upon every new emergency; and as
they have now begun to be collected, they will be more easily paid at
another time.

Besides, what an acquisition will be made to the revenue by the
extinction of 16 millions of life-annuities, and by the expiration of so
many anticipations of taxes for terms of years!

On the other hand, it is not to be supposed that the King will continue
to demand of the clergy, above 1 500 000 livres a year, or one shilling
in the pound upon their benefices. That body is becoming daily more and
more indebted, by the practice introduced of late, of making payment of
their free gifts to the King, by borrowing the money, instead of paying
every one’s proportion out of his benefice. This in time may oblige them
to accept of pensions for their benefices, and to make over their
revenue in tithes to the King: they will, at least, in one way or other,
become entirely at his mercy, and at that of their own creditors.

Before I conclude, I must say a word concerning the method of levying
the taxes in France.

The most general distribution I can make of this, is to reduce it under
four principal heads.

The first comprehends the general _receptes_; to wit, the _taille_, or
land-tax, the _capitation_, or poll-tax, and all the twentieths. These
are administred by the intendants of the provinces, who both make the
distribution of them upon the subjects, and who levy them by officers
under their direction; and for the expence of levying, is superadded to
the taxes, 10 _per cent._ upon the whole. When they are collected, they
are paid in to the receivers general at Paris, who deliver them in, and
account for them to the royal treasury.

The second comprehends all the taxes which are farmed. The farmers are
vested with the King’s authority for raising the duties let to them,
according to certain regulations; and as they are obliged to keep open
books, the expence of management is known, and at every new lease a
reasonable profit is allowed to them over and above.

The third branch comprehends all free gifts of determinate sums of
money, imposed according to certain regulations prescribed to those
bodies politic who pay them; into which may be comprehended all taxes
upon the clergy; because they levy them themselves.

The fourth comprehends retentions which the King makes out of the
salaries he pays. This needs no explanation.

What farther observations may be made on this head will find a place
when we speak of taxes.


------------------------------------------------------------------------


                               CHAP. VII.
_Comparative View of the Revenue, Debts, and Credit of Great Britain and
                                France._


In comparing the state of credit in the two nations, I must first
observe, that it is not so essential to compare the _extent of the
revenue_ of both countries, as the _resources_ they have for obtaining
extraordinary supplies in case of need.

Whatever be the permanent revenue of a state, we may be very certain
that the exigencies of it will be in proportion; and whenever any
extraordinary expence is to be incurred, it must be provided for by
extraordinary means.

In examining the state of Great Britain and France, we have found this
observation verified. If the expences of the year do no more than absorb
the revenue of it, and if the sinking funds appropriated for paying off
incumbrances be properly applied, the state has no reason to complain.

This distribution evidently points out how necessary it is not to
confound those branches of revenue which are appropriated to state
expences, with those which ought to be set apart for the payment of
debts and interest. This however I apprehend is too much neglected in
both kingdoms.

If times of tranquillity be not made use of, to disengage those funds
which necessity had opened, it cannot be denied, that future exigencies
must then seek for a supply, from resources as yet undiscovered.

That nation, therefore, which has certain branches of revenue lying
dormant in time of peace, has the advantage in point of resources.

In this respect the advantage hitherto has lain on the side of France;
she has had her _dixiemes_, _vingtiemes_, and double poll-tax, which
have never been imposed except in cases of necessity.

But on the other hand, Great Britain has a noble and opulent branch of
permanent taxes, which composes her sinking fund. Were this employed in
times of peace, as it ought to be, it would prove in time of war a more
ready fund of credit than any France can boast of.

Those extraordinary resources of France cannot be mortgaged. They are
supplies for the current service; but they are no fund of credit.
Whereas the sinking fund of Great Britain is always ready in the mean
time to supply urgent demands. While this subsists, there is no danger
of being obliged to break faith with all the public creditors, upon a
demand for a million and a half sterling, as was the case with France in
1759. The one resembles a credit in bank; the other the rents of a great
estate. The sinking fund affords time to raise new supplies, in
proportion to the debts contracted; and if these, when new, and raised
in time of war, prove sufficient to answer the interest of the loan,
they will probably do more as they continue to be levied, and upon the
return of peace.

One very remarkable difference between the state of credit in the two
nations is, that in Britain the object of attention is the rate of
interest; in France it is the speedy repayment of the capital. The great
care of a British minister is to support the price of the funds: the
meaning of which is, to keep the interest of money low. Did not the
price of the funds regulate the rate of money, the state would be nowise
concerned in the price of them.

Now the credit of Great Britain is so firmly established, that she may
command money at all times, providing she will give the interest
required.

The case is totally different in France. Her credit is not well
established; that terrible Missisippi-monument, of near a thousand
millions, standing fixed upon the ordinary revenue to this day at 2½
_per cent._ first reduced from the most exorbitant interest, by
successive acts of power, after the late King’s death, and afterwards
from a moderate interest to 2½ _per cent._ in the year 1720, is reason
sufficient to deter monied men from lending to France upon perpetual
interest.

In borrowing upon life-annuities at 10 _per cent._ and upon lotteries at
nearly the same rate, for 11 or 12 years, France obtains credit for
large sums. She also borrows with tolerable success at 5 _per cent._
when there is a lottery-clause put in, which stipulates a large sum to
be annually paid for extinguishing the capital. The reason is, she is
more punctual to such engagements: they remain constantly under the eye
of the public: the stock-holders consider their money as constantly
coming in; and any interruption in the payment gives a general alarm.
But when funds are settled at perpetual interest, people lose sight of
the capital altogether. The contracts by which they are commonly
constituted, are not so easily transferred as other funds: in a word, it
is not the taste of the French nation to lend their money in that way,
and far less the taste of strangers; and the reason is, that as matters
have hitherto been conducted, it has by no means been their interest.

Before the commencement of the late war, no security in France was
looked upon as better than the actions of the company of the Indies.
This was a fund of perpetual interest. They brought in to purchasers
little more than 4 _per cent._ and every body wished to have them. Every
action bore a dividend of eighty livres a year; and the action itself
sold from eighteen to nineteen hundred livres. The war had not lasted
four years, when the dividends were reduced to one half, and the capital
fell to about 700.

In short, all perpetual funds in France, whether upon government or
company-security, are very precarious; and while this is the case, we
may decide that the credit they are built on is precarious also.


------------------------------------------------------------------------


                              CHAP. VIII.
  _Contingent Consequences of the Extension of Credit, and Increase of
                                Debts._


Having applied the principles of public credit to the state of facts in
Great Britain and France, such as I have been able to collect, I must
observe, that all short sketches of this kind are intended only to
satisfy a general curiosity which mankind has, to know a little of every
thing. Although they may appear superficial and incorrect, to persons
thoroughly instructed in those matters, they still are for our purpose;
which is only to take them as something approaching nearer to truth than
bare suppositions can do; and they sufficiently answer the purpose of
illustrating the subject we are upon.

I now proceed to inquire what may be the consequences of this mighty
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 that 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, providing 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, and that 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 teaches 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.

This is a very rational conclusion from past experience; but it is only
relative 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 might 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 kingdoms 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
operate 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: and if from small beginnings it has
arrived at the pitch we now see, it is very natural to conclude, that,
in time, it may become stronger, and at last, that 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 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 remains at home, it will
animate every branch of circulation; and when the exigency, 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 new fund for contracting more debts, 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 is transferred to a new set of men, who
were once the monied interest, and who afterwards acquire the lands, and
consolidate this additional 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, 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 a monied interest into a landed interest, insensibly
inspire the bulk of the landlords with sentiments analogous to a monied
interest? Is not that 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 French King’s free revenue should
afford credit to borrow this coin; and if, instead of providing a
proportional supply of currency to fill up this new loan, the coin
borrowed be sent out of France; how will the ordinary circulation be
carried on?

Let us here recal 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, when money is confined
to the coin, will be very long in adopting the sentiments of a monied
interest; whether for its profit or loss, in the end, is not here the
question.

We have now traced the contingent consequences of public credit so 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 those
reciprocal sentiments of good-will among the two great classes of a
people, and thereby preserves 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 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 was 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.

By the monied interest, properly, should be understood, those 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. I hope this idea is clear, and understood. Stock, therefore, I
here consider as one great branch of solid property; so 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 arises from the land, money, trade, industry, &c.
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 debts increase, by the monied interest realizing into this
branch of solid property, the more the taxes must augment; and
consequently, the more the solid property of the funds themselves will
be affected, as well as the land.

From this exposition of the matter, I think it appears pretty evident,
that as proportional taxes affect every man’s income, according to his
consumption; the landlord, _cæteris 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 only pays the proportion of the last.

But the condition of the stockholder is not equal 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 that diminution, the value of land is
augmented. 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 this respect, that he thereby
diminishes the interest he pays upon his debts, if he has any; and if he
has none, it enables him to borrow at a lower rate for the future; and
by improving his lands with the money borrowed, he augments 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 enjoy 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 is 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 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 a million; it is paid in paper, and must be sent to
Holland. If at that time a balance be due by Holland for a million,
bills will readily be found for it. In this case, the balance of trade
is borrowed by government, and is 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 the balance had not been due to them. This I call a
_lucrum cessans_ to the country.

But suppose no balance due 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 comes from 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 that 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 filled 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 to
continue paying a higher interest at home for what they owe?

It is my opinion that still they ought to borrow, for the following
reasons. That if the high interest at home proceeds 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 that 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, 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
is necessary, and that in consequence of it, too much should come to
stagnate at home, after the demand of government is over, in that case,
the monied interest would 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.

1_mo_, 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.

2_do_, That this income so created, may be either the property of
natives, or of strangers.

3_tio_, That when money is found to stagnate, in a country where
circulation is not diminishing, it may be supposed to proceed from the
coming in of a right balance of trade.

4_to_, If stagnations in one part are 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.

5_to_, 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 out of 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 like payments made to Englishmen by other nations.

6_to_, 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 establishing luxury at home.

7_mo_, 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.

8_vo_, 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 is 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[36].

Footnote 36:

  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.

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 only certain
individuals, who pay it to others.

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, without proper measures being 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 will be raised on the subject for the payment of it.
The question then comes to be, 1. How far may debts extend? 2. How far
may taxes be carried? And 3. 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 that 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 vestige of our former ignorance in matters ©f taxation.

The notion of imposing (_facto_) 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 class must be determined by foreign
trade; because this is affected in a certain degree by the price of
domestic industry. Other taxes have not this effect, as we shall shew in
its proper place.

But as foreign trade is not essential to the domestic industry,
consumption, circulation, &c. of any nation, as has been proved in the
second book, but only to their increasing in wealth proportionally to
other nations; if foreign communications should be 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 will
the consequence 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
they will administer for the 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.

Then government 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 only
equal to the interest of the money wanted; and in that way set out upon
a new system of borrowing, until the amount of taxes 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 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 only introduced it 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.


------------------------------------------------------------------------


                               CHAP. 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 those consequences are only 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 decide, that one of three events must happen, viz.
either, 1. Debts will swell to such a pitch as at last to pay
themselves: or, 2. The nation will be involved in a bankruptcy: or, 3.
They will be fairly paid off.

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 is 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 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, I shall
consider afterwards; at present, I shall 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 only partial; and by
such an 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 cannot 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 taxes
might so far diminish, as to prove insufficient to pay the interest of
the national debt, and defray the expence of 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:

1_mo_, Every creditor of the state would become poorer in proportion to
the diminution of his income.

2_do_, 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.

3_tio_, 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 then would 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 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 only 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 no
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 cooly 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 that 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 for
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 that 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
them, 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, interest 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 charity,
would suffer: all the great establishments for labour and industry,
would fall to the ground: the numbers of poor who are there maintained,
would come upon a society, which is beginning to lose those tender
feelings of compassion, which are more common in countries of idleness,
in proportion as misery is more 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
perform this great revolution: the operation is not as yet compleated,
and a total bankruptcy now would destroy every good effect 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, be 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. 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 inconveniencies beyond
the power of any theory to extricate.

Upon the whole we may determine, 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. 1. A relief to
those who pay them upon their possessions, or persons. 2. 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 which influence the application of public money, will point
out better expedients than a bankruptcy for comparing those great
national purposes.

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 acknowlege, 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.

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 combination 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.

1_mo_, That the most important object in paying off debts, is to get
quit of those due to strangers.

2_do_, 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 inconveniencies 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 that 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 infinite: 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
that can be feared 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 to operate a total failure of 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_,
providing 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 such engagements, the best resolution a nation can
take, is to adhere to them to the last extremity, and to banish from
their thoughts every idea which may be repugnant to them.


------------------------------------------------------------------------


                                CHAP. 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 the chief object of the lender, a much more extensive 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
contract 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 contracting 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 that 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, in the place 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 as to the people, is to _enable_ them to
do what he requires of them.

For that 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 it, in paying what is demanded of them by authority, as he
himself has in paying what he is obliged to in consequence of his
engagements.

If this general plan be not followed, the consequence will be, that
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 is prepared, every obstacle which
occurs in establishing it is 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 that proportion, interest will not rise; and if
borrowing should fall below that proportion, interest will sink.

Is not this whole doctrine verified in the strongest manner by the
operation of the Missisippi? 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 a bubble _in fact_; 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 money in proportion to their
property or industry; and to prevent the latter from ever failing for
want of the medium, money, for carrying it on.

So long as interest stands 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 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
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 it 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 finds 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 that 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 of 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, 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 transfer at discount; and when he transferred in favour of an
Englishman, the debts may 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 rendred 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 that 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 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 more closely
connected with that of his banks than was the case during the distress
in Scotland: because if he does 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 not be paid; and his people will be
oppressed. But if he pursues 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 industry or
to consumption for want of money; a great part of the former solid
property will be melted down into money; whatever part of that 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 stagnate in the hands of
individuals, and will, in their favour, be realized in that part of the
solid property which was 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 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 can only buy lands
by selling 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 that operation, the money still
remains in circulation; 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,
that 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 infallible 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 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 banks 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
19_s._ 11¾_d._ in the pound, is a bankrupt, as well as he who cannot pay
one farthing.

I now come 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.

2_do_, _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.

3_tio_, _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.

4_to_, _They_ may be paid in one sense, as shall be farther explained,
by reducing the interest upon the capitals, without diminishing them.

5_to_, _They_ may be paid off by converting them into annuities for
lives.

6_to_, And lastly, _they_ may be paid off under 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 gaining.

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 their 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.

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 the
revolution, 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
Richlieu for discharging the debts of France; 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 of 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 that 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 few 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 a-new; 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[37].

Footnote 37:

  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 hid; and opinions concerning their figure and rank 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 combine circumstances
  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 their own bodies; that is, in their own house, and in
  their own families: no country seats, hounds, horses, servants in
  every quarter, family interest to keep up, little oeconomy 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.

But suppose it should not immediately regorge, it would then increase
expence and consumption; consequently, would advance industry, and
render every branch of excises more productive. In every combination we
can form, 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 proposed for acquitting
the public debts. As the nature of it is abundantly evident, I shall
only repeat what I formerly observed, 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 only take place after interest 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
anywhere 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 considerably 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 alledged. 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 74¾,
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 ¼ _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 connection of the subject would have suffered little in
blending them together. But as I find it is 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.

END OF THE FOURTH BOOK.

------------------------------------------------------------------------

------------------------------------------------------------------------

                                   AN

                                INQUIRY

                                INTO THE

                   PRINCIPLES OF POLITICAL OECONOMY.

------------------------------------------------------------------------

                                BOOK V.
                OF TAXES, AND OF THE PROPER APPLICATION
                            OF THEIR AMOUNT.


------------------------------------------------------------------------


                             INTRODUCTION.


The subject of taxes is so closely connected with every branch of
political oeconomy, that I have not been able to avoid anticipating a
subject, which, according to my plan, is left for the conclusion of this
work.

What has been hitherto introduced concerning taxation, in treating of
industry, trade, money, credit, and debts, relates principally to the
effects of taxes upon circulation, prices, and several other things
relatively to those subjects.

What therefore remains, not as yet touched upon, chiefly concerns the
principles which determine the nature of every tax, relatively to the
interest it is intended to affect.

To investigate the different consequences of taxes when imposed upon
possessions, and when upon consumption, are questions which relate
directly to the principles of taxation. But in this book I shall also
have occasion to trace out, farther than as yet I have done, certain
combinations concerning the effects which taxes have in multiplying the
fund of circulation: and as the augmentation of taxes tends greatly to
increase money, I am thence led to examine, how far the advantage gained
by the suppression of taxes may not be more than compensated to a
nation, by the inconveniences proceeding from so great a diminution of
circulation.

Taxes have all along been supposed to enhance the price of living; we
shall therefore have an opportunity of investigating the proper extent
to be allowed to that general proposition.

                                CHAP. I.
                   _Of the different Kinds of Taxes._


Taxes have been established in all ages of the world, under different
names of tribute, tithe, tally, impost, duty, gabel, custom, subsidy,
excise; and many others needless to recapitulate, and foreign to my
subject to examine.

Though in every species of this voluminous category, there are certain
characteristic differences; yet one principle prevails in all, upon
which the definition may be founded.

I understand therefore by _tax_, in its most general acceptation, _a
certain contribution of fruits, service, or money, imposed upon the
individuals of a state, by the act or consent of the legislature, in
order to defray the expences of government_.

This definition may, I think, include, in general, all kinds of burdens
which can possibly be imposed. By fruits are understood either those of
the earth, of animals, or of man himself. By service, whatever man can
either by labour or ingenuity produce, while he himself remains free.
And under money is comprehended the equivalent given for what may be
exacted in the other two ways.

I have no occasion to consider the nature of such taxes as are not in
use in our days. Tributes of slaves from conquered nations are as little
known in our times, as contributions of subsistence from the subjects of
the state.

I divide, therefore, modern taxes into three classes. 1. Those upon
alienation, which I call proportional: 2. Those upon possessions, which
I call cumulative or arbitrary: and 3. Those exacted in service, which I
call personal. These terms must now be fully explained, that I may use
them hereafter without being misunderstood.

A proportional tax presents a simple notion.

It is paid by the buyer, who intends to consume, at the time of the
consumption, while the balance of wealth is turning against him; and is
consolidated with the price of the commodity.

Examples of this tax are all excises, customs, stamp-duties, postage,
coinage, and the like.

By this definition, two requisites are necessary for fixing the tax upon
any one: first, he must be a buyer; secondly, he must be a consumer. Let
this be retained.

A cumulative or arbitrary tax, presents various ideas at first sight,
and cannot well be defined until the nature of it has been illustrated
by examples.

It may be known, 1_mo_, By the intention of it; which is to affect the
possessor in such a manner as to make it difficult for him to augment
his income, in proportion to the tax he pays.

2_do_, By the object, when instead of being laid upon any determinate
piece of labour or consumption, it is made to affect past and not
present gains.

3_tio_, By the circumstances under which it is levied, which imply no
transition of property from hand to hand, nor any change in the balance
of wealth between individuals.

Examples of cumulative taxes are land-taxes, poll-taxes, window-taxes,
duties upon coaches and servants, that upon _industrie_, in France, and
many others.

A personal tax is known by its affecting the person, not the purse of
those who are laid under it. Examples of it are the _corvée_, in France;
the six days labour on the high roads, and the militia service before
pay was allowed, in England[38].

Footnote 38:

  The _corvée_ in France is the personal service of all the labouring
  classes, for carrying on public works. Were they paid for in money, it
  is computed they would amount to no more than 1 200 000 livres a year.
  This tax was omitted in the account of the French revenue.

Having thus explained what I mean by proportional, cumulative, and
personal taxes, it is proper to observe, that however different they may
prove in their effects and consequences, they all agree in this, that
they ought to impair the fruits and not the fund; the expences of the
person taxed, not the savings; the services, not the persons of those
who do them.

This holds true in every denomination of taxes. In former days, when
annual tributes of slaves were paid, and even at present among the
Turks, where it is customary to recruit the seraglios of great men by
such contributions, I consider the young women who are sent, as part of
the fruits of the people who send them. This is a fundamental principle
in taxation; and therefore public contributions, which necessarily imply
a diminution of any capital, cannot properly be ranged under the head of
taxes. Thus when the Dutch contributed, not many years ago, the
hundredth part of their property towards the service of the state, I
cannot properly consider that in the light of a tax: it was indeed a
most public spirited contribution, and did more honour to that people,
from the fidelity with which it was made, than any thing of the kind
ever boasted of by a modern society.


------------------------------------------------------------------------


                               CHAP. II.
           _Of proportional Taxes, and their proper Object._


Whatever exists for the use of man, so far as it is considered as a fund
for taxation, may be classed under the following heads: 1. The produce
or fruits of the earth; 2. the produce of the industry of man; or 3. his
personal service. Farther,

Fruits cannot be obtained without the necessary labour of man and
cattle. As this labour presupposes all the necessary consumption of
maintenance, &c. the produce of the land must be understood, with regard
to taxes, to be that part of the fruits only which remains after
deducting an equivalent for all necessary expences in making the earth
produce them. The net produce alone of the earth is to be considered as
a fund liable to taxation; and every contribution which bears not a just
proportion to that quantity, is wrong imposed, as shall be shewn as we
go along.

Again, as to the produce of work: this cannot be brought into existence
without some expence, viz. the maintenance of the workman; that is to
say, his food, raiment, fire, lodging, and the expence he is at for
tools, and every other necessary. This we shall, for the future, call
his physical-necessary. The value of the work, over and above an
equivalent for these articles, is the only fund to be taxed with regard
to the workman.

As to work itself, we have seen above (Book II. chap. 26.) in the
general distribution of things which may be purchased with money, how it
was ranged under the class of things incorporeal. For that reason, the
work performed cannot come under taxation; and therefore the person
working, who by work acquires a balance in his favour, is brought to be
affected by proportional taxes upon the articles of his consumption; and
when it is found that these articles suffer no alienation before they
are consumed by him, and consequently escape taxation, then he may
either be laid under the cumulative taxes, which will affect his wealth,
or under the personal, which are paid in work itself, and in that
respect may be considered as the fruit of the man.

Nothing would be so easy as a general rule for imposing proportional
taxes, did the labourers of the ground actually consume a part of the
fruits of the earth, and the other industrious classes a part of their
own work, in lieu of this physical-necessary. In that case, nothing but
what remained of fruits and work, not already consumed by the immediate
producers, would come to market for the use of those who do not work;
but who have an equivalent to give for it, out of the produce of past
industry. Were that, I say, the case, then at the time of alienation
(or, as we expressed it in the 26th chapter of the second book, at the
time when the balance of wealth is going to turn in favour of the
industrious, against the idle consumer) a tax proportional to the value
of the alienation might, with the greatest propriety, be imposed, as we
shall presently discover.

This, I hope, will recall to mind the principles deduced in the chapter
above cited, where we made it appear, how the industrious classes, who
furnish consumable commodities for the price of their overplus, must
constantly have the balance of wealth turning in their favour: and when
once they arrive at a certain degree of ease, proportional to their
ambition, then they give over working, and become incorporated into the
class of those who have enriched them.

Thus matters go on in a perpetual circle. The industrious become easy,
and the public lays the consumers under a perpetual contribution in
proportion to their expence.

The hypothesis we have made, is not entirely agreeable to matter of
fact; because the operation of taxes is far more complex than we have
described it to be; but by simplifying it, as I have done, it serves to
give an idea of the result, or general consequence of proportional
taxes, which, when properly imposed, do affect the idle only, but never
the industrious.

Were, I say, the operation of taxation as simple as we have represented
it, nothing would be more easy than to deduce its principles. Nothing
would come to be refunded to the labourer or workman, at the sale of his
surplus. This surplus would be equal to the whole produce of the earth,
and whole industry of the country, deducting the physical-necessary of
all the industrious; and this physical-necessary need not then be
deducted; because it is supposed to be consumed in the very production
of the surplus, as the aqueous part of sea water is consumed before you
can have the salt.

This illustrates what has been said, viz. that the fruits of the earth
are only to be reckoned to exist, after deducting the necessary expence
of providing them. For though in fact a farmer possesses all his crop
after harvest, yet part of it, _as to him_, is virtually consumed out of
his own stock, or that of others who have furnished him food and
necessaries all the time it was coming forward: consequently, that part
neither belongs to the ground, or to the farmer.

If it be urged still, that the whole must be supposed to exist with
regard to the state, I agree to the proposition; but according to our
argument, it must not be supposed to exist in favour of the state, to
the prejudice of the farmer; for this reason, that the total of the
farmer’s expence must be understood to have been taken from the surplus
of other people’s industry, and therefore if the crop be supposed to
exist with respect to the state, because it is in the farmer’s yard, the
surplus of industry which he has consumed must not be supposed to exist
in favour of the state, at the same time. But as the farmer is supposed
to have paid the tax upon what he has borrowed and consumed, he must
_draw it back_ from those who, in their turn, are to consume his crop:
and if he draws it back, he cannot be said to pay it, although the state
profits of it as much as if he did.

Does it not appear from this analysis, that a state can only take
gratuitously and proportionally out of the surplus of fruits and
industry? Now what is here called surplus, relatively to the
industrious, is the necessary fund of consumption for all the rich and
idle; consequently, were the state to diminish any part of the
_quantity_, the idle and the rich would be deprived of a sufficiency:
but in regard that those who do not work give money, which is the price
of all things, in exchange for what they consume, there the state steps
in, and says, we ask nothing of those who have nothing but their
physical-necessary, this they have been allowed to take; we take none of
their surplus from them, this we allow them to sell to you: but as for
you, who do not work, and have in your coffers wherewithal to purchase
the labours of your industrious brethren, this labour you shall not
profit of, unless you give the state a certain value out of your wealth,
in proportion to the work and fruit you are going to consume, although
you have contributed nothing towards the production of it.

Hence it appears evident, that without _money_ there could be no tax
imposed: for were the state to take their proportion of the real
surplus, and dispose of it out of the country, a part of the inhabitants
would be starved. But by an equivalent’s being found, quite different
from the surplus itself, of no use for subsistence, the whole produce of
industry is left for the use of those who have it; the state takes what
part of the equivalent they please from the idle; and no body starves,
but such as have not money, nor industry, nor the talent of exciting the
compassion of the charitable.

By this simple representation of a most complicated operation, I have
been able to deduce the capital principle of proportional taxation. If
the reasoning be found solid, it may be retained; because we shall have
occasion to recur to it, at almost every new combination.


------------------------------------------------------------------------


                               CHAP. III.
_How proportional Taxes are drawn back by the industrious, and how that
     drawing back is the only reason why Taxes raise the Prices of
                             Commodities._


What perplexes our notions in the theory of proportional taxation, is,
that the industrious man, instead of bringing his surplus to market, is
obliged to bring the whole of his work.

Let me, therefore, suppose him to be creditor upon one part of his work,
and proprietor of the other. This will divide it, as it were, into two
parts, which I shall call (A) and (B).

(A) represents that part upon which he is creditor, and answers to all
the expence he has already been at; that is, to his physical-necessary,
as we have called it. This we have said ought to be considered as
virtually consumed by the workman, and if a tax be raised upon it, it
must not affect _him_; that is, he must draw it totally back from the
person to whom he disposes of it. (B) on the other hand, represents that
part of which he is proprietor, to wit, his profit; and therefore may
either be taxed or not, as the state shall think it.

If it be taxed in the hands of the industrious man, without suffering an
alienation, the tax will be of a cumulative nature. If it be left free
to him, and taxed to the person who buys it, it will be of the
proportional kind, as we shall see afterwards. Again,

In the first case, it will check the growing wealth of the industrious
man; in the second, it will accelerate the dissipation of the buyer.

Taxes, therefore, of the first kind, are proper to be imposed in
countries where the state is jealous of growing wealth, as we have
observed in the 25th chapter of the second book. If the tax, again, be
laid upon the buyer, then the balance turns in favour of the industrious
man, in proportion to the full amount of (B), and produces no other
effect than to accelerate the dissipation of the buyer.

Let us now take in a new combination.

If, when the work is brought to market and sold, the price shall not
exceed the value of the industrious man’s (A), then he is of the class
of those we call _physical-necessarians_, who accumulate no profits. If
the price of it be less than (A), he becomes a load upon the state, a
bankrupt to those who have fed him upon credit, and will die for want,
unless he be supported by charity.

So far with regard to the seller: next as to the buyer.

The buyer appears at market with his money. When he comes there he must
give, first, an equivalent for the prime cost of the merchandize; that
is, he must refund every expence necessarily incurred in producing it;
or he must refund the value of (A). Next, the industrious man has a
claim upon him for his profits, viz. his (B). Then comes the state, who
claims a part of his wealth, in regard that he is going to purchase what
his own industry has not produced. This is the tax; I shall call it (C).
This tax will be found of the proportional kind. It will not affect the
growing wealth of the seller, but it will accelerate the dissipation of
the buyer; and will pull down the scale against him, in favour of the
industrious. This is a proper tax, in countries where the state observes
the maxim of sharing the wealth of those who dissipate.

Let us now take in another combination. Let us suppose this buyer to be
an industrious person, and the thing bought to be a necessary material
for the manufacture in which he is employed. Is it not plain, that when
the second industrious man comes to market to sell his work, which I
also suppose composed of his (A) and his (B), that his (A) is a still
more compounded body? It first includes his own physical-necessary, as
above: 2. the (A) and (B) of the man from whom he bought the materials:
and 3. the (C) which he paid to the state for the liberty of acquiring
what he himself had not produced.

Whoever therefore buys from the second industrious man, must, in like
manner, refund to him his full (A); he must also pay him his (B); and
then he will find the state claiming their (C), as in the former
operation.

This being done, let us examine the interests of all parties. The first
industrious man has no reason to complain of the tax; because he was
paid his necessary expence (A), and also his (B) for his profit; and the
state realized the tax at the expence of the second industrious man, who
paid it. Now we said that the dissipation of his wealth was accelerated
in proportion to the value of what he paid for (C); but as he is none of
the idle, and as the thing bought was a material necessary for his
manufacture, the second buyer finds himself obliged to refund the whole
amount of the first (A), (B), (C); because the sum of them make a part
of the second man’s (A). Now it is the refunding of this (C) to the
industrious man which is the only circumstance, from which proceeds the
rise in the price of commodities, in consequence of proportional taxes.
Moreover, the second buyer must pay the second industrious man’s (B), in
favour of the balance which is going to turn against him; and last of
all, he must pay the second (C), which is the share the state requires
of him, in order to accelerate his dissipation.

Now let us observe, that if the commodity bought by the second
industrious man, be not necessary for the existence of his manufacture,
it cannot enter into his (A), and therefore must be diminished upon his
(B); and if his (B) cannot pay it, then he will owe it to some body, and
for the future must either abstain from such expences, or leave off
working, in favour of those who can live without them.

Let me illustrate all this by an example.

A tanner sells his leather to a shoemaker; the shoemaker in paying the
tanner for his leather, pays the tanner’s subsistence and profit, and
the tax upon leather.

The man who buys the shoes for his own consumption, refunds all this to
the shoemaker, together with his subsistence, profit, and the tax upon
shoes; consequently, the price of shoes are raised, only by refunding
the taxes paid by the industrious.

But if the shoemaker’s subsistence shall happen to include either tavern
expences, or his consumption on idle days, he will not draw these back;
because other shoemakers who do not frequent the tavern, and who are not
idle, will undersell him: he must therefore take his extraordinary
expence out of his profits; and if his profit be not sufficient, he must
run in debt to the tavern-keeper.

The extravagance and idleness, therefore, of particular workmen does not
check industry, nor raise prices; for these will always be in proportion
to demand, and there is no reason why demand should either rise or fall,
because a particular workman is extravagant, or consumes a commodity not
necessary for his manufacture or subsistence.

From this example there arises a new combination: that in proportion as
the industrious do not consume of the produce of their own industry, but
come to market with the whole, and then purchase the work of others,
they are considered, as to taxes, in the light of idle consumers, who do
not work, but purchase with money the fruits of the industry of others.
By this operation, the taxable fund is augmented beyond the extent of
the general surplus called (B). The reason is plain. Whatever is brought
to market is supposed to be surplus, as it _may_ there be bought by the
idle, as well as the industrious. The only difference is, that the first
do not draw back the tax, and that the second do, as we have already
shewn.

From this reasoning we may conclude, that the way to carry proportional
taxes to their utmost extent, is to draw all commodities to market, to
engage every one to carry thither the whole produce of his industry, and
buy whatever he stands in need of.

But which way will you engage either a farmer to sell his crop, and buy
subsistence from another; or a shoemaker to sell his own, and buy his
neighbour’s shoes? The thing is impracticable; and were it attempted, it
would prove an arbitrary proceeding, and a cumulative tax laid upon
their industry: a tax which, by the nature of it, they cannot draw back,
as we shall presently see, and from this circumstance alone proceeds the
whole oppression of it.

Let me next analize the price paid by the last buyer, whom we have
called the rich and idle consumer of the manufacture, who can draw
nothing back from any body.

Is it not composed of the whole value of the subsistence, of the work,
of the profits, of the tax? The whole reimbursement of all former
payments and repayments lands upon him. Those who have been at all the
expence, appear in the light of his servants and agents, who have only
advanced money upon his account.

How absurd, therefore, is it either to say, that all taxes fall
ultimately upon land; or as others, for no better reason, pretend, that
they fall upon trade. I say, that this category of taxes which I have
now been describing, and which I shall still more fully explain in a
subsequent chapter, never can either fall upon, or affect any person but
the idle; that is to say, the not industrious consumer. If there be
found a possibility for any consumer to draw back the tax he has paid, I
say he is of the class of the industrious, in one way or other: and I
farther say, that such a tax raises the price of the commodity. But by
drawing back, I understand, that the repayment is an inseparable
consequence of his having paid the tax. I do not, for example, say that
a place-man draws back his taxes by the emoluments of his office: but I
say a brewer draws back his excise by the sale of his beer.

Let this principle also be retained, that with respect to the
consumption of superfluities by the manufacturing classes, they must be
considered as being of the class of the rich and idle, as much as the
first Duke in England. When therefore the extravagance of the
manufacturing classes becomes general, and when the rate of the market
can afford them great wages, relatively to the price of necessaries,
such profits consolidate into the price of the manufacture, according to
the principles laid down in the 10th chapter of the second book. The
statesman then must endeavour to create a competition, by introducing
fresh and untainted hands into such branches. This will be a sure check
upon the industrious, and, if rightly applied, will prevent all frauds,
all pretences for the rise of the price of labour on account of taxes:
and, if carried to the full extent, will prevent any industrious person
from enjoying either a day’s idleness, or the smallest superfluity;
except in consequence of his peculiar dexterity, or extrinsic
advantages.


------------------------------------------------------------------------


                               CHAP. IV.
                         _Of cumulative Taxes._


I shall not repeat what I have already said concerning the
characteristics of this kind of imposition; but after citing some
examples, I shall examine it more closely, as to its nature and
consequences.

The most familiar examples of it to an Englishman, are tithes, land-tax,
window-tax, and poors-rates.

The most familiar examples to a Frenchman, are the _Taille_, _Fourage_,
and _Ustencil_, (which go commonly together) also the _Capitation_, the
_Dixieme_, the _Vingtieme_, and the _Industrie_[39].

Footnote 39:

  The _Taille_ is properly a land-tax, to which men called _noble_ are
  not subjected. The reason of which is, that it was originally imposed
  in lieu of such personal military services as were peculiar to the
  lower classes.

  The _Fourage_ and _Ustencil_ are laid upon all those who pay the
  _taille_, and are in proportion to it. The first is appropriated for
  the subsistence of the cavalry, when they are in quarters; the last
  for kettles and small utensils for the infantry.

  The _Capitation_ is the poll-tax. The _Dixiemes_ and _Vingtiemes_ have
  been already explained, and tithes are well known to every one.

  The _Industrie_ is that imposition arbitrarily laid on by the
  Intendants of provinces, upon all classes of industrious people, in
  proportion to their supposed profits in every branch of business.

The nature of all these taxes, is, to affect the possessions, income and
profits of every individual, without putting it in their power to draw
them back in any way whatever; consequently, such taxes tend very little
towards enhancing the price of commodities.

Those who come under such taxes, do not always consider that their past
industry, gains, or advantages of fortune, are here intended to suffer a
diminution, in favour of the state; for which outgoing they have,
perhaps, made no provision.

When people of the lower classes, instead of being subjected to
proportional taxes, are laid under such impositions, there results a
great inconvenience. They are allowed to receive the whole profit of
their industry, which in the former chapter we called their (B), the
state however reserving to itself a claim for a part of it: this,
instead of being paid gradually, as in a proportional tax, is collected
at the end of the year, when they have made no provision for it, and
consequently, they are put to distress.

Besides, how hard is it to deprive them of the power of drawing back
what they pay? And how ill judged to trust money with those who are
supposed only to gain an easy physical-necessary? An equivalent for
procuring the articles of ease and luxury, should not be left in the
hands of those who are not permitted to enjoy them.

From this we may conclude, 1. That the more such taxes are proportional
to the subject taxed, 2. the more evident that proportion appears; and
3. the more frequently and regularly they are levied, the more they will
resemble proportional taxes, and the less burden will be found in paying
them. Let me illustrate this by some examples.

The stoppage upon a soldier’s pay, either for the invalids, or Chelsea,
is a cumulative tax; but the method of levying it gives it all the
advantages of one of the proportional kind. 1st, It bears an exact and
determinate proportion to the value of his pay. 2_dly_, This proportion
he knows perfectly. And 3_tio_, Instead of receiving the whole into his
own possession, and paying the hospital at the end of the year, it is
regularly and gradually retained from him at every payment.

Tithes are a cumulative tax; but they are accompanied with all the three
requisites to make them light; although in other respects they are
excessively burdensome. 1_st_, They bear an exact proportion to the
crop. 2_dly_, This proportion is perfectly known. 3_dly_, Nature, and
not the labourer, makes the provision. But they fall upon an improper
object: they affect the whole produce of the land, and not the surplus;
which last is the only fund that ought to be taxed.

The land-tax in Scotland bears, 1_st_, a very determinate proportion to
the valuation of the land; and has, 2_dly_, the advantage of being well
known to every contributor; so that provision may easily be made for it.
But the third requisite is wanting: the proprietor having the public
money in his hands, often applies it to private purposes; and when the
demand is made upon him, he is put to distress.

The _taille_, in many provinces of France, bears, first, a very exact
proportion to the value of the land[40].

Footnote 40:

  This sort of _taille_ is called _tariffée_; because it is imposed
  according to a valuation of the land. It is a late improvement; but
  still is exposed to numberless inconveniences, which are mentioned in
  the text.

But in the second place, the proportion is entirely unknown to the man
who pays it; being nowhere to be seen but in the offices of the
intendant and his deputies.

And in the last place, the whole payment comes at once.

What hides, and consequently destroys this proportion, is, that after
the distribution is laid on, as in Scotland, at so many shillings in the
pound of valuation, the full sum intended to be raised does not come in;
either because the intendant has given exemptions to certain parishes,
on account of the accidents of sterility, hail, mortality among the
cattle, and the like; or because the property of a part of the parish
has fallen into the hands of people exempted from the _taille_; or that
others, who were really bound to pay part of it, are become insolvent.
The intendant must then make a second, and perhaps a third general
distribution of the deficiency upon all the contributors, in the most
exact proportion to the first, but yet by their nature impossible to be
foreseen. It is for these reasons chiefly that the _taille_ in that
kingdom is so grievous.

These second distributions of the tax, 1_st_, destroy the proportion
between the tax and the revenue taxed. _2dly_, They make it impossible
to judge of the amount of them. And lastly, the demand comes at once,
when, perhaps, the money has been otherwise applied.

The French tax upon industry is more grievous still; because none of the
three requisites above-mentioned are allowed to operate.

This tax is supposed to be proportional to the profits made upon trade,
and other branches of industry, not having the land for their object.
All merchants and tradesmen, in cities, and in the country, pay the tax
called _Industrie_; and the reason given for establishing this tax, as I
have said in another place, is in order to make every individual in the
state contribute to the expence of it, in proportion to the advantages
he reaps. Nothing would be more just, could it be put in execution,
without doing more hurt to the state, than the revenue drawn from it can
do good.

I shall now shew how, in this tax, all the three requisites we have
mentioned are wanting.

1_mo_, By its nature, it can bear no exact proportion to the profits of
the industrious man; since nobody but the person taxed can so much as
guess at their extent.

2_do_, It cannot possibly be provided for, as no check can be put upon
the imposer, unless so far as general rules are laid down for each class
of the industrious; and from these again other inconveniences flow, as
shall be observed.

3_tio_, It comes at once upon poor people, who have been frequently
forced to beg for want of employment before the tax-gatherer could make
his demand; and those who remain, frequently become beggars before they
can comply with it.

I say, that from the general rules laid down for regulating this tax, as
to every class, a workman who has a large family to maintain, is no less
taxed than one who has no charge but himself: and it will be allowed, I
believe, that the profits of one industrious person of the lower
classes, is in no country sufficient to pay any considerable tax, and
maintain a large family, much less a sickly one. I therefore imagine,
that cumulative taxes never should be raised upon such classes of
inhabitants as have no income but their personal industry, which is so
frequently precarious.

Merchants also ought not to be subjected to any tax upon their industry.
They ought to be allowed to accumulate riches as fast as they can:
because they employ them for the advancement of industry; and every
deduction from their profits is a diminution upon that so useful fund.

When cumulative taxes are laid upon any of the industrious classes, they
tend to check growing wealth; and are most familiarly imposed in
monarchical states, where riches are apt to excite jealousy, as has been
observed.

But as to the class of land proprietors, that is to say, the more
wealthy inhabitants, who live upon a revenue already made, the
impropriety of cumulative taxes is much less. They are however
burdensome, and disagreeable in all cases, and ought to be dispensed
with, when the necessary supplies can be made out by proportional taxes,
without raising the prices of labour too high for the prosperity of
foreign trade.

From the examples I have given of this branch of taxation, I hope the
nature of it may be fully understood, and that for the future no
inconvenience will arise from my employing the term of _cumulative tax_.
I shall now subjoin its definition.

A _cumulative tax_, is _the accumulation of that return which every
individual, who enjoys any superfluity, owes daily to the state, for the
advantages he receives by living in the society_. As this definition
would not have been understood at setting out, I thought it proper,
first, to explain the nature of the thing to be defined.


------------------------------------------------------------------------


                                CHAP. V.
_Of the Inconveniences which proceed from proportional Taxes, and of the
                       Methods of removing them._


A proportional tax, as I have said, is that which is levied upon the
idle consumer, at the time he buys the commodity; and while, by
consuming it, the balance of wealth is turning against him, in favour of
the seller. This tax is consolidated as it were with the price of the
commodity, and must of necessity raise it.

I say, it is levied at the time of buying, and affects the buyer, in
consequence of his consumption; because we have seen, that when the
commodity is not consumed by the purchaser, then upon a subsequent
alienation he is refunded all he paid. I consider him therefore, in that
case, not as _paying_, but as _advancing_ it for another; and while any
part of the commodity remains unconsumed, there still remains the
equivalent of a proportional part of the tax in the hands of him who
advanced it.

I shall now proceed, as in the former chapter, by giving some examples
of such impositions; and in examining them, endeavour to shew their
nature and consequences.

The most familiar to an Englishman are, _excises_, _customs_,
_malt-tax_, _stamp-duties_, and the like.

To a Frenchman the _gabelle_, the _traittes_, the _aides_, _tobacco_,
&c.[41]

Footnote 41:

  The _gabelle_ is a branch of the general farms, and consists of an
  excise upon salt. The manufacture of the commodity is in the hands of
  the farmers; and they, for a liberty to sell salt at a certain price,
  far above the expence of the manufacture, pay to the King an annual
  revenue of 28 millions of livres.

  This I call a proportional tax, relatively to consumers; although in
  reality no tax-gatherers are employed for the collection of it,
  contrary to what is the case of all excises; which are never farmed by
  government to the manufacturers of the commodity taxed.

  The _traittes_, or, as they are otherwise called, the five great
  farms, were established by Colbert, when he took away a multitude of
  customs paid upon the transportation of goods from one province to
  another. They answer very much to our customs, or to the duties of
  tunnage and poundage, and are let to the farmers general for the sum
  of 12 millions.

  The _tobacco_ is of the same nature with the salt tax. The farmers
  general have the exclusive privilege of selling it at a price fixed by
  the King.

  For the farm of the tobacco is paid 15 millions. The _aides_ resemble
  our excises more than those we have mentioned. They consist in duties
  upon liquors, either brought into towns, or sold by retail in public
  houses; and upon all articles of food sold in corporations, except
  grain of every kind, which is free. They comprehend also a multitude
  of other duties superfluous to enumerate. They are collected by
  tax-gatherers at the gates of every town, who also have access to all
  public houses, where retail is laid under additional rates. The
  _aides_ are farmed at 38 600 000 livres. These were the rates in the
  farms let in 1755. They have been since augmented in 1762, as has been
  observed.

In all kinds of this imposition we find the tax regularly reimbursed
from hand to hand; it adheres so closely to the commodity, that it
becomes as essentially a part of the value, as carriage, packing, and
the like incident charges, enter into the prices of goods. It never can
affect the industrious person who does not consume; and never can be
avoided by him who does. Such taxes therefore necessarily raise the
price of the commodity taxed.

Having already pointed out the principal advantages of proportional
taxes, which is to throw the whole of the burden upon the rich, whom we
have called the idle consumers, the better to distinguish them from the
opulent class of the industrious; I must now enumerate the principal
inconveniences complained of, from this mode of taxation, and trace out
the principles from which they may be ascertained and removed.

The principal inconveniences alledged against proportional taxes may be
reduced to three:

1_mo_, That they have the effect of raising the price of labour, and the
produce of industry, and thereby prove hurtful to the prosperity of
foreign trade.

2_do_, That they discourage consumption, by carrying the prices of many
things too high for people of a middling rank in life.

3_tio_, That they are both expensive in the collection, and oppressive,
from the many restrictions put upon liberty, in order to prevent frauds.

In analyzing every one of these inconveniences, it will be proper to
inquire, how far the conclusions against those taxes are drawn from
matter of fact; how far from plausible appearances only; and so far as
they are real, not imaginary, to discover the methods of removing them.

As the first inconvenience lies in raising the price of all kinds of
labour, and consequently of manufactures, I must distinguish between the
consequence of raising prices at home, and of raising them upon articles
of exportation; and I must consider the one and the other relatively to
the collective body of a state, and not to some few individuals in it.

High prices at home are no discouragement to the industrious, most
certainly, however disagreeable they may prove to consumers; and while
they stand high, it is a proof that the demand of the consumers does not
diminish.

High prices upon goods to be exported, are to be judged of by the
proportion they bear to those in other countries.

Now the price of a manufacturer’s wages is not regulated by the price of
his subsistence, but by the price at which his manufacture sells in the
market. Could a weaver, for example, live upon the air, he would still
sell his day’s work according to the value of the manufacture produced
by it, when brought to market. As long as he can prevent the effects of
the competition of his neighbours, he will carry the price of his work
as high as is consistent with the profits of the merchant, who buys it
from him in order to bring it to market; and this he will continue to
do, until the rate of the market is brought down.

It is therefore the rate of the market for labour and manufactures, and
not the price of subsistence, which determines the standard of wages.
Were proportional taxes to raise the price of subsistence, and by that
circumstance to discourage manufactures, we should see the generality of
workmen living with sobriety, depriving themselves of superfluity,
confining themselves to the plain but sufficient physical-necessary,
working with all the assiduity that a man can support, and still not
able to supply the market at the ordinary rates.

When in any country the work of manufacturers, who live luxuriously, and
who can afford to be idle some days of the week, and still live upon
their wages, finds a ready market, this circumstance alone proves beyond
all dispute, that subsistence in that country is not too dear, at least
in proportion to the market prices at home; and if taxes on consumption
have, in fact, raised the price of necessaries, beyond the former
standard, this rise cannot, in fact, discourage industry: it may
discourage idleness; and idleness will not be totally rooted out, until
people be forced, in one way or other, to give up both superfluity and
days of recreation.

People are very apt to draw conclusions from what they think ought to
be, according to the particular combinations they form to themselves;
and for this reason it is generally thought, because taxes are higher in
England than in some other countries, that foreign trade should
therefore be hurt by them. But the sloth and idleness of man, and the
want of ambition in the lower classes to improve their circumstances,
tends more, I suspect, to circumscribe the productions of industry, and
thus to raise their price, than any tax upon subsistence which has been
hitherto imposed in that kingdom.

The whole of this doctrine is proved by experience, and is confirmed by
our natural feelings. Many have been amazed to see how well the
manufacturing classes live in years of scarcity, which frequently have
the effect of doubling the price of the most necessary articles of
subsistence. Are they not found, in bad years, more assiduous in their
labour? Do they then frequent ale-houses, as in the years of plenty? Are
they found idle one half of the week? Why should a tax laid on by the
hand of nature prove such a spur to industry; and another, similar to it
in its effect, laid on by the hand of man, produce such hurtful
consequences? Were a tract of bad years, I dare not say an increase of
taxes, to continue long enough to bring manufacturers to a habit of
sobriety and application, a return of plenty, and low prices, would
throw into their coffers, what many of them dissipate in riot and
prodigality.

Even this conclusion will be too general, if every combination be taken
in. Manufacturers there are, who work hard, and live soberly six days of
the week, and who at the end find little superfluity, notwithstanding
the high price of labour. Alas! they have many mouths to feed, and only
two hands to supply the necessaries. This is the fatal competition so
much insisted on in the first book, and by which a door is opened to
great distress. Either the unmarried gain what the married should, and
become extravagant, or the married gain no more than the unmarried can
do, and become miserable.

The average between the two ought to determine the rate of wages in
every modern society.

The remedies for this unequal competition, flowing from the happy
liberty we enjoy, have been considered in another place.

The inconvenience here under examination will not be removed by an
abolition of taxes; nor will it increase by the augmentation of them, as
long as manufacturers, upon an average, enjoy superfluity and idle days.

Under these circumstances I conclude, that if foreign trade suffers by
the high prices of commodities in our markets, the vice does not proceed
from our taxes, but from our domestic luxury, which swells demand at
home. Were we less luxurious, and more frugal in our management in
general, all classes of the industrious, from the retailer down to the
lowest manufacturer, would be satisfied with more moderate profits. Let
not, therefore, a statesman regulate his conduct upon suppositions, nor
conclude any thing from theory, nor from arguments _à priori_, drawn
from the supposed effects of taxes; but let him have recourse to
information and experience concerning the real state of the matter.

Let him inquire what are the prices abroad; what are the prices at home;
how those who work in exportable commodities live; what superfluities
they enjoy; and what days of idleness they indulge in.

If he finds that goods are not exported, because of high prices, while
manufacturers are enjoying superfluity, and indulging themselves in
idleness, let him multiply hands, and he will reduce them all to their
physical-necessary; and by thus augmenting the supply, he will also
reduce the prices in his markets at home.

If he wants to reduce prices still lower, in favour of exportation, but
finds that he has occasion for the amount of certain taxes, which
enhance the value of this physical-necessary, to which he has reduced
his industrious classes, then let him grant a bounty upon the quantity
exported, more than equivalent to all the taxes paid by those who
provide it; and let the people at home continue to pay dearer than
strangers, in favour of the state. If you only want to promote
exportation by lowering prices, there will be no occasion to lower them
universally, any more than there is occasion to put a large plaister
over the whole body, to cure a small pimple on a particular part of it.

I have said, that while the rate of the market remains the same, so will
the prices of every part of labour and industry, which enters into the
composition of the thing brought to market. This is consistent with
reason, and experience proves the truth of it; because we do not see
wages fluctuate with the price of living. If they do not fluctuate in
that proportion, how can we conclude that a rise in the price of
subsistence, occasioned by taxes, should raise wages more than when the
price is raised by a natural scarcity. It may be answered, that the
imposition of a tax gives a general alarm; the effect it must have upon
prices is immediately felt; and manufacturers then insist upon an
augmentation: whereas, when nature either produces the same, or even a
greater effect, people submit to what they think comes from the hand of
God, and content themselves with the hopes of better times. I shall
allow this argument all its force. But I must observe, that when
manufacturers can thus capitulate with their employers, and insist upon
an augmentation of their wages, the demand of the market must be greater
than the supply from their work. This is the circumstance which raises
the price of labour. Let the demand of the market fall, the prices of
labour will fall, in spite of all the reasons which ought naturally to
make them rise. The workmen will then enter into a hurtful competition,
and starve one another, as has been often observed. Let the demand of
the market rise, manufacturers may raise their wages in proportion to
the rise of the market; they may, in the cheapest years, enjoy the
highest wages; drink one half of the week, and laugh at their employer,
when he expects they should work for less, in order to swell his profits
in the rising market.

I have endeavoured to throw this question into different shapes, the
better to apply different principles to it; and upon the whole, I must
determine that proportional taxes will,

1_mo_, Undoubtedly raise the price of every commodity upon which they
are properly and immediately imposed; and if they be laid upon bread,
and other articles of nourishment, they will directly raise the price of
these articles in proportion; but the price of labour will be raised
consequentially only, and according to circumstances.

That if taxes be laid upon the day’s labour of a man, they will raise
the price of that day’s labour. What I mean by this, is, that if every
one who employs a man for a day, were obliged to pay a penny to the
state, for a permission to employ him, the employer would charge a penny
more at least upon the day’s work performed by the labourer. Were a tax
equivalent to it laid on the labourer by the year, it would be of a
cumulative and arbitrary nature, and would not raise the price of his
wages in proportion; but were it laid upon the workman at a penny a day,
and levied daily, in this case, he might raise his wages in proportion.
But this is not the practice any where.

2_do_, The price of subsistence, whether it be influenced or not by the
imposition of taxes, does not determine the price of labour. This is
regulated by the demand for the work, and the competition among the
workmen to be employed in producing it.

3_tio_, If wages rise beyond the physical-necessary of the workman, they
may be brought down by multiplying hands, but never by lowering the
price of necessaries; because every man will make a profit of the low
price, but will regulate his gain by the rate of demand for his labour.

4_to_, If, therefore, the price of his physical-necessary be raised upon
him by the effect of taxes, he must work the harder to make it up.

5_to_, If hands increase, after he is reduced to his physical-necessary,
the whole class of the manufacturers will be forced to starve.

6_to_, The increase of hands means no more than the augmentation of the
quantity of work produced. If, therefore, the same hands work more than
formerly, it is the same thing as if their numbers were increased.

From these positions it seems to result, that whenever it is found that
manufacturers enjoy wages more than in proportion to their
physical-necessary through the year, reckoned upon the general average
of married men and batchelors, the method of reducing them to the proper
standard, is either to multiply hands, if you want to reduce prices in
your own market, or to augment the price of their physical-necessary, if
you incline they should remain the same. When the hands employed are
really diligent, and prices still too high, then it may be expedient to
increase their numbers, providing they enjoy considerable profits. This
will cut them off, and reduce the price of commodities; because it will
augment the supply.

When the hands employed are not diligent, the first expedient is to
raise the price of their subsistence, by taxing it. By this you never
will raise their wages, until the market can afford to give a better
price for their work. If, when they are brought to be fully employed,
you incline to sink the price of labour universally, you must take off
some of the impositions which affect subsistence, and at the same time
gradually throw in fresh hands, in order to promote competition, which
alone will force them to lower their prices in proportion. The whole
delicacy of this operation is to prevent competition from taking place
after the industrious are reduced to moderate profits; and to promote
competition, or to raise the price of their subsistence, until they be
brought to the proper standard. Having insisted so fully upon these
principles in the xviiith chapter of the second book, I here refer to
it.

1 have said, that the price of work is not regulated by the price of
subsistence, but by the price of the market for the work. Now I say,
that the price of the market may in a great measure be influenced by the
price of subsistence. This is a new combination.

The first proposition is undeniable. The price of the market at all
times _regulates_ the price of work; because it regularly makes it
fluctuate, in proportion to its own fluctuations. The price, again, of
subsistence only _influences_ it; because two circumstances may destroy
that influence. A high demand for work will raise the price of wages in
years of plenty: a low demand will sink the price of wages in years of
scarcity. When therefore it is said, that the price of subsistence
_influences_ the rate of markets, we only mean, that the average price
of subsistence, when good and bad years are taken together, have a
certain influence in regulating prices. But this average price of
subsistence cannot every where _regulate_ the value of work, as the
average price of a ship’s cargo can regulate the price of every part of
it; because the variations there are at too great a distance of time, to
be able to compensate one another with respect to all the manufacturing
classes of a people.

Could a plan be concerted, either to preserve the price of grain at one
uniform standard, or within the limits of 15 or perhaps 20 _per cent._
at all times; and were this to be executed by the assistance of a tax at
one time, and a bounty as it were at another; it would certainly have an
admirable effect in every industrious nation. It would in a manner take
away the difference between good and bad years. The industrious finding
themselves subsisted at all times nearly at the same expence, would not
feel those alternate motives to be idle and extravagant at one time, and
diligent and sober at another.

I have enlarged so much upon the nature of this first inconvenience
proceeding from proportional taxes, that I have left myself very little
to say as to the second, which is,

2_do_, That they discourage consumption, by raising prices too high for
people of a middling rank in life.

In answer to this, I must observe, that all the amount of proportional
taxes is refunded to the industrious consumer, so far as they are raised
on articles _necessary_ for his subsistence; and when he is either idle,
or consumes a superfluity, he is classed along with the idle and rich.
Now if the rate of market prices be high, relatively to the income of
certain individuals, it can only be because the supply of the things
they want to consume is not above the proportion of the demand of those
who are richer.

If, therefore, the rate of the market affords such profits to
manufacturers as to render them idle and luxurious, how can the
augmentation of these profits, by the abolition of taxes, and consequent
diminution of the price of subsistence, ever diminish the competition of
the rich, unless the supply be augmented?

But if the high prices of our own markets cut off the demand of
strangers, then every principle laid down in the 10th and 18th chapters
of the second book, must be applied to bring them down: and so far as
taxes, which are imposed either to supply the exigencies of the state,
or to cut off consolidated profits, enjoyed by manufacturers in
consequence of our own extravagance, have contributed either to raise
them, or to support them when raised, above the foreign standard, a full
equivalent, in the way of bounty, must be given for them, in order to
bring the exportation price of goods below the level of foreign
competition.

I come now to the last inconvenience alleged against proportional taxes,
to wit, the expence of collecting them, and the oppression which is a
consequence of the many restrictions laid upon liberty, in order to
prevent frauds.

As to the expence of collection, it is entirely in proportion to the
disposition of the people to defraud the public.

In France, the collecting the branches of cumulative taxes, such as the
general receipts, comprehending the taille, poll-tax, &c. costs the
state no less than 10 _per cent._ or two sols in the livre, which is
superadded to those impositions, in order to defray that expence.
Whereas in England the expence of collecting the excise, administred by
commissioners, who act for the public, not by farmers who act for
themselves, does not cost above 5_l._ 12_s._ 6_d._ in the 100_l._

This matter of fact is sufficient to prove, that excises, when under a
proper administration, are not so very expensive in the collection as is
generally imagined; and they would still be attended with less expence,
were some proper alterations made in the present method of imposing
them. This will appear as we go along.

The _oppression_ of levying excises does not, in any proportion, so much
affect those who really _pay_ them, as those who only advance them for
the consumers.

This distinction which we have already made, will appear well founded,
upon examining the complaints which are commonly made against the
collectors of this duty.

We have seen that in the taxes upon salt and tobacco in France, there
are no duties collected upon the people; the farmers of the salt have
all the salt marshes and salt pits assigned to them by the King; no
person, not privileged, is allowed to make salt for the consumption of
those provinces which are subjected to the Gabelle.

In like manner the distribution and sale of tobacco is exclusively in
the hands of the farmers: they buy it either from Great Britain, or from
the Dutch at second hand; they manufacture it themselves, and sell it
over all France, at the price set upon it by the King; and we saw, that
during the last war, they paid thirty millions down for a permission to
raise the price of it 10 _per cent._ during ten years. This price fixed
upon the sale of tobacco, answers exactly to what we know under the name
of assize, which ought constantly to attend all excises[42]: for want of
observing exactly that regulation, the publicans and victuallers in
England raised the price of their strong beer one halfpenny _per_ quart,
in consequence of an additional duty of three shillings _per_ barrel
imposed _anno_ 1761, which is at the rate only of one farthing _per_
quart[43].

Footnote 42:

  When excises are imposed upon any commodity, it is contrary to all
  principles in fixing the assize, not to superadd the whole duty
  imposed to the former selling price. This however is sometimes
  omitted, with an intention to make part of the duty fall upon the
  manufacturer, to the ease of the subject. The consequences are,

  1_mo_, The manufacturers blow up the spirit of the people against the
  tax, who never would think of making an outcry, were they not excited
  to it by the interested motives of the manufacturers. Were high
  profits allowed on imposing the tax, manufacturers would be quiet: and
  if the profits were afterwards found to be too high, it would then be
  a popular measure to reduce the selling price, and also a means of
  setting people on the side of government, against the manufacturers,
  who are their real tax-gatherers.

  2_do_, It is impossible to compass the end proposed. A proportional
  tax, rightly imposed, must be drawn back; and all attempts to prevent
  it, only occasion a multiplication of frauds, and a bad manufacture.

  In fixing assizes upon the manufacture of goods, which in different
  years vary in their price, regard should be had to such variations;
  otherwise the manufacturer is distressed, and the public is ill
  served: and the one or the other happening, the people are animated
  against such duties.

  The only expedient to share the profits of the manufacturers of
  exciseable commodities, is to lay them under some cumulative tax which
  they cannot draw back, such as making them pay for a licence.

Footnote 43:

  It must, however, be observed, that the price of beer was not raised,
  either by the brewers, or by the victuallers, on account of the
  additional malt-duty, _anno_ 1760.

When the sale of an exciseable commodity is vested in a company who
manufacture it, by exclusive privilege, the whole oppression of
collection is avoided; because the company itself then pays the duty,
and they draw their reimbursement from proportional profits on the sale
of the goods.

This is the greatest advantage of the farm above the public management
of a tax.

When excises are levied upon those who manufacture the commodity
excised, the oppression of the laws falls upon the manufacturers,
although they only advance the tax, and draw it back from the consumers
upon the sale of the commodity.

It is greatly for the advantage of every consumer in the kingdom, that
no fraud in the collections should pass unobserved; because all the
profits arising from frauds belong to the manufacturer, who in reality
is the tax-gatherer, as much as the farmers in France, when they sell
their salt and tobacco. But as the farmers appear in the light of King’s
officers, and that the collectors seem to bear hard on those with whom
they live, people foolishly imagine, that were brewers, for example,
more gently dealt with, beer would come the cheaper to themselves. This
is a mere delusion; because no brewer whatever will sell his beer
cheaper than either an assize, or the ordinary rate obliges him to do,
let his profit, from frauds, be ever so great, and his address in
committing them ever so successful; and the less productive the tax
turns out to be, the more the other impositions upon the people must be
augmented, in order to make up the deficiency.

If we compare therefore the oppression of excise-laws felt by those who
only _advance_ these impositions, with the ease which the consumers find
who really _pay_ them, we may judge of the advantages which the
proportional taxes have over the cumulative.

The excise, as paid by the brewer, is really of the cumulative kind. The
exciseman demands money of him, at a time when no alienation takes
place, and perhaps when he is not prepared to make the advance for his
customers, who must refund it to him with profit: besides the hopes of
being able to defraud is disappointed, and it is always disagreeable to
be disappointed in what we either wish or hope.

Were all mankind honest, the inconveniences of levying such taxes would
be less; but as that is not the case, methods must be fallen upon to
disappoint the intention of committing fraud. The only way to accomplish
this, is, to render it difficult and dangerous. While every individual
has a liberty to manufacture an exciseable commodity in whatever place
he thinks fit to enter for that purpose, when every one has a liberty to
sell liquors, which, upon retail only, are subjected to excise (as is
the case in France) must not collectors be multiplied in proportion to
the occupation which such policy implies? And will not these collectors
oppose frauds to frauds, in order to profit by them, at the expence of
the merchant or manufacturer? This will sow discord and hatred between
two classes of the same society, and thereby the state is hurt. All
discord hurts a state, as it does a private family.

It is out of my way to lay down plans for preventing such
inconveniences. It would require an intimate knowledge of every
circumstance relating to the country for which the remedy is intended.

I shall therefore endeavour only to throw out some useful hints, by
mentioning the impositions where the inconveniences in levying are the
least; and by comparing these with other impositions, where the
oppression in levying appears to be greater, the contrast of
circumstances will suggest the principles upon which a plan might be
formed.

There are many more frauds and difficulties in collecting excises in the
country than in cities, from the number of manufacturers employed in
them. It is just so with the _aides_ in France, from the number of
retailers. There are very few frauds and little difficulty in gathering
the malt-tax; because the object is unwieldy, and the places of
manufacture are fewer.

The frauds upon tobacco and salt in France, do not proceed from those
who manufacture them, but from those who introduce foreign goods to
supply the place of those manufactured by the company. This shews that
excises should be made as general as possible over a country; because
local exemptions introduce, as it were, a foreign country into the
center of a state.

Stamp-duties are seldom defrauded by forging the stamp; but in France,
where they extend to almost every _deed_ of alienation, the public is
defrauded by private bargains.

Customs are defrauded by the liberty given to trade in every port; and
from the want of convenient public magazines, as a proper repository for
all goods brought by sea.

It may be said, in general, that frauds are most frequent upon the new
establishment of taxes; that those who complain most of the oppression
of them, are precisely those who have the least reason for it; and that
the cause of their complaint proceeds rather from the inconvenience in
paying when they are not prepared, and the disappointment in defrauding,
than from any real oppression arising from the laws of excise: the
hardships of these laws are owing to the necessity of general rules to
prevent frauds; and such rules would be unnecessary, could the liberty
of committing frauds be circumscribed.

One very good method of raising proportional taxes, without great
expence or oppression, when the situation of a country will admit of it,
is to levy no such duties, but at the gates of towns and villages, which
in this light appear to be political inclosures. At those gates every
produce of the lands, and every manufacture not made in the town, might
pay a tax upon coming in; every manufacture made in the town, might pay
a tax on going out: all fruits consumed in the country might be free;
all manufactures made and consumed in the towns might be free also. If
we consider the quantity of exchange between the inhabitants of towns
and those of the country, and between town and town; that fund, I
believe, would be found sufficient to raise more by proportional taxes
than what is raised in any country in Europe.

A second method of diminishing the expence, and also the burden of
proportional taxes, is to exact nothing of the manufacturers, but to
prohibit the delivery of the manufacture to any one who does not present
a permit from the excise office, signifying that the tax has been paid.
This is the method observed in the Austrian low countries, where excises
are carried to a very great height. There the transporters or carriers
of exciseable goods, are formed into a corporation, and none else dare
to transport them.

Whoever has seen the execution of those regulations will not be very
fond of them; but the inconveniences which occur proceed from the
political situation of all those towns, the public debts of which are so
enormous, that to pay the interest of them excises have been carried so
high as to banish manufacturers into the country, where few excises are
levied. It is from the country and many considerable villages, which
have not the privilege of running in debt, that the manufactures of that
country are carried on. No industrious man can afford to live in the
towns of the Austrian Netherlands, except he who supplies their
consumption; and in no place, I know of, is work so dear as there.

Were great excises levied upon the furnishers of the goods, as is the
case in Great Britain, and were as little restraint laid upon their
frauds, those duties would not produce what they do; and the oppression
would be intolerable; whereas by the policy established, nothing but the
high price of goods is complained of. A third method of avoiding both
expence and oppression in levying proportional taxes, would be to
confine the fabrication of all articles charged with them to certain
places properly inclosed. Were those undertakings few and large, were
spacious magazines of all sorts prepared, at the public expence, in all
sea-port towns, and surrounded with walls, an entire liberty might be
allowed within the inclosures, and no questions would be asked, but on
going in and coming out. Under such regulations a state would reap great
benefit. 1_st_, There would be considerable savings in collecting.
2_dly_, There would be great savings on the number of hands employed in
manufacturing: forty men, in a large brew-house, make more beer than an
hundred disposed as they are in country villages. This resembles the
introduction of machines into manufactures.

The objection from the infringement of liberty is more a pretext, in
order to facilitate fraud, than any thing else. Are not those who
manufacture exciseable commodities, the servants of the state? Are they
not even the collectors of the public revenue? With what face then can
they pretend to be indulged in the means of defrauding their customers
of those taxes which they wish to put into their own pockets, by
withholding them from the public. Has liberty any other meaning, but an
entire permission to do whatever is not forbid by general and wholesome
laws, calculated for the universal good of the society; and shall this
class of men, who are enriching themselves as much by the profits they
have in advancing the taxes, as by their industry, be considered in as
favourable a light as another who is paying a cumulative tax out of his
income, one farthing of which he never can draw back?

If any should misinterpret the doctrine of this chapter, I must put them
in mind of my original plan, which was to keep constantly in view those
virtuous statesmen who think of nothing but the good of their subjects.
Taxes and impositions in their hands, are the wealth of the father of
the family; who therewith feeds, clothes, provides for, and defends
every one within his house. The increase of taxes on this supposition is
national oeconomy, as shall be afterwards shewn; frauds are the thefts
of servants impairing the public good, and particularly the means o£
self-defence against the incroachments of ambitious neighbours.

As it is the duty of every statesman to make his people happy and
flourishing, perhaps the speculations of one whose only interest in
throwing them upon paper is to fill up his leisure agreeably, may some
time or other tend to promote so glorious a purpose.


------------------------------------------------------------------------


                               CHAP. VI.
   _Cumulative and proportional Taxes compared with one another, and
                           farther examined._


After examining separately the nature and effects of cumulative and
proportional taxes, it remains, for the more fully understanding this
subject, to take a view of them together; the better to find out wherein
they really differ, and how far the difference is only apparent.

It has been observed, that the payment of taxes diminishes no part of
the produce of either land, or industry; the whole amount of these
remains entire to the subjects of the state.

The taxes are paid out of the money which circulates in the alienation
of them: from which we have concluded that they must constantly be
confined within a certain proportion to alienation. We have also
observed, that the imposition of taxes augments the mass of circulation,
and makes it requisite for a statesman to contrive some method of
increasing money in proportion to their increase. I hope these
propositions have acquired an additional confirmation, from what has
been already said in the preceeding chapters.

We have also seen how the amount of proportional taxes is ultimately
taken from the superfluity of the rich, whom we have called the idle
consumers: and how they are advanced by one set of the industrious, and
refunded by another, until at last they fall upon those who cannot draw
them back from any body. These last have been said to _pay_ the taxes,
the others only to _advance_ them.

If therefore we suppose all desire of defrauding out of the way, we
shall find the whole burden of proportional taxes confined to the
inconvenience of advancing their amount by the industrious, and to the
payment of them by the rich, which proportionally diminishes their
income. Where credit therefore is well established, where payments are
regularly made by buyers to sellers, and where people proportion their
expence to their free income, the weight of proportional taxes will be
very small. I appeal to experience for the truth of this.

Let us next examine the nature of cumulative taxes, as we have called
them, in order to distinguish them from the others.

In these, alienation is not necessary at the time they are paid; from
which it follows, that, in many cases, they cannot be drawn back. When a
man pays his land-tax out of his rent, what remains to him will not buy
more of any thing than if he had paid nothing. Nay, were the state to
indulge him and take his tax in corn, the corn which remains to him
would not bear an advanced price, unless the state should export the
quantity he had given; and then indeed, by diminishing the supply, it
might raise the price of grain in general; but every one having grain to
sell would profit of the rise upon the price, as well as the landlord,
whose share does not commonly amount to one third of the crop.

But were a tax laid on in so regular a proportion to the value of any
property, as to prevent the proprietor from making use of that part
which the public intends to take from him, those who pay cumulative
taxes would thereby acquire one very great alleviation of their burden.

I have said that when a brewer pays the excise, the tax, as to him, is
of the cumulative nature. It is so in a certain degree, no doubt, as may
be seen without farther explanation; but it still so far retains its own
nature as to be easily drawn back from the consumer. But how can a
soldier draw back the tax he pays to Chelsea?

From this material distinction between the two impositions, I conclude,
that no objection can lie against proportional taxes, so far as they
affect the industrious; because they draw them compleatly back: and that
great objections lie against cumulative taxes, when they affect the
industrious, because they cannot draw them back; and consequently, they
may affect the physical-necessary of the contributor, in case no profit
should remain to him upon his labour. On the other hand, I think little
objection can be made to cumulative taxes, when they are imposed upon
possessions, which produce a visible annual revenue, clear to the
proprietor. This is the nature of the _dixiemes_ and _vingtiemes_ in
France; where the whole amount of the person’s income is taken upon
proper proof, and taxed in proportion to it, without any subsidiary or
second levy’s taking place, to make up a determinate sum.

Cumulative taxes would also be far less burdensome to the lower class,
could they be levied, so as, first, to preserve the proportion of them
to the actual profits on industry: secondly, to make that proportion
sensible to the people: and in the last place, to _retain_ the tax,
instead of allowing them first to receive it, and afterwards obliging
them to refund it.

In proportion as these three requisites do not take place, such taxes
become grievous to all who have no fixed income.

To put a tax upon a man’s dwelling house, in proportion to its windows,
or hearths, when the house produces no fixed income to him, and when he
has none independent of it, may take away a part of his
physical-necessary. To put a tax upon him because he has a head, is more
grievous than to put a tax upon his hands, in proportion to what they
daily gain.

If cumulative and proportional taxes be compared, with respect to the
different effects they are found to have upon our opinions as to taxes
in general, we find that both of them deceive the contributors, but in
different ways.

In the cumulative taxes, the person who pays does not always perceive
the reason of his paying. He imagines that he is taxed only because it
is known that he is able to pay a certain sum.

In the proportional, the deceit is of another nature. When a person buys
a consumable commodity, which has paid an excise, he does not perceive
that the price he pays for it comprehends a tax upon his past gains, in
favour of the public; but he concludes the whole to be necessary, in
order to procure what he has an inclination to consume. An example will
make this plain.

Suppose a tax laid upon wheel carriages, and that every person in the
state were liable to pay a certain sum in proportion to the number of
carriages he has for his convenience. The tax-gatherer comes at the end
of the year and demands the sum. The person complains that he is not at
liberty to have a coach or a chaise without paying duty for it; and that
while he has occasion for one carriage only, and has but one pair of
horses, he is obliged to pay for several sets of wheels.

Now, suppose this cumulative tax were turned into a proportional one,
and that wheels were to pay a stamp-duty, or the like, in the hands of
the wheelwright. The price would immediately rise; but this rise would
soon become familiar to the man who has the carriage; and he would then
be no more hurt by this additional expence, than if it had proceeded
from some new and expensive fashion of wheels: in short, wheels would
generally begin to bear an advanced price, and very soon no body would
inquire how it came about, nor once complain of the tax.

To set this in another light, the difference between the two impositions
resembles that between long and short accounts, which to poor people is
very great. When the expence of living is insensibly and universally
augmented, by the effect of proportional taxes, then the industrious
man, who enjoys neither superfluity or idleness, may and can augment the
price of his work in proportion. This augmentation forms then a part of
what has been called his (A), which he draws fully back when he comes to
market. But if the same, or even a less sum be raised upon him by a
cumulative tax, it comes upon him at the end of the year, or at the end
of the quarter, and let him be ever so provident, he cannot draw it
back, or raise the price of his work, because of the unequal competition
of other people of his own class, who, from a variety of circumstances,
cannot all be so equally loaded by the cumulative as by the proportional
taxes. Besides, they may not be so provident as himself, and may work
for subsistence, without making any allowance for what they are to pay
the state at the end of the year. Thus a double inconvenience ensues.
The industrious poor are oppressed by the tax-gatherers, and the tax is
ill levied. In the other case, the first never see a tax-gatherer, and
the money is paid. Besides these advantages in favour of proportional
taxes, there is still another, that if this tax be improperly laid on,
the defect will manifest itself by checking consumption only; whereas in
the other case, it will be known by the distress of individuals.

If the liberty not to consume be taken away, as in the gabelle in some
provinces in France, then the imposition changes its nature and becomes
a cumulative tax, as may be easily perceived[44].

Footnote 44:

  The _gabelle_, or salt-tax in France, is not levied in every province;
  because of certain privileges of exemption, which some have all along
  enjoyed.

  This opens a door to the greatest abuse, by smuggling salt from places
  where it is free, into places where the tax is imposed, at many 100
  _per cent._ above the value; and obliges the King to use great
  severity upon those who are loaded with this duty.

  The consumption of every family is fixed to a certain quantity; and if
  it be found that they have not bought, from the King’s granaries, to
  the full extent of what is reckoned necessary for them, it is supposed
  that the deficiency has been made up from contraband salt, and the
  deficiency is exacted.

It has been said, that so far as the three inconveniences of the
cumulative taxes can be prevented, they cease to be oppressive. From
which we see the reason why excises are so easily paid when those who
manufacture the commodities charged with them, are contented to compound
for them. This changes the tax into one of the cumulative kind; but
gives it every requisite to make it easy. Let me take an example.

A brewer who pays excise for all he brews, is exposed to the daily visit
of the excise-man, to whom he pays the duty. Here the brewer’s
imposition participates of several of the inconveniences attending
cumulative taxes. But let me suppose that after a certain time he finds
that 100_l._ is the annual amount of his excise. If he makes a
composition for it at that rate, he comes under a regular cumulative
composition, with every advantage. He thinks no more of frauds; he no
more grudges what he pays; and becomes in a manner collector of that
imperceptible duty paid by all his customers.

The easy method of transforming those taxes into one another, shews
their resemblance sufficiently, and the differences which we have
pointed out, shew the principles which regulate the proper manner of
imposing them.


------------------------------------------------------------------------


                               CHAP. VII.
  _Consequence of Taxes when the amount of them is properly applied._


We have now seen the objects affected by taxes, and the inconveniences
which result to those who are obliged to pay them.

It comes next to be examined, whether or not taxes of all kinds be a
great load upon a people, a grievous infringement of their liberty, a
means of bringing many honest and industrious people to great distress,
and a great discouragement to marriage. I answer without hesitation,
that taxes may be, and most commonly are accompanied with all these and
many more inconveniences; but I must add, that they proceed from the
abuse, and not from the nature of taxes.

In my inquiries, I have constantly in my eye, how man _may_ be governed,
and never how _he is_ governed. How a righteous and intelligent
statesman may restrain the liberty of individuals, in order to promote
the common good; never how an ignorant and unrighteous statesman may
destroy public liberty, for the sake of individuals.

Raising money by taxes must always be burdensome, less or more, to those
who pay it; and the advantages resulting from taxes can only proceed
from the right application of the money when raised.

When individuals only make a profit of the inconvenience of taxes, the
public loses, no doubt; because they are paid for the advantage of the
public, not for that of private people. If the money raised be more
beneficially employed by the state, than it would have been by those who
have contributed it, then I say the public has gained, in consequence of
the burden laid upon individuals; consequently, the statesman has done
his duty, both in imposing the taxes, and in rightly expending them.

Taxes, in this last view, may be considered as a saving out of every
private fortune, in order to procure a public fund to be expended for
the public benefit.

I have frequently recourse to the familiar examples of private oeconomy,
in order to make applications from it to the political; which, however
different it may appear, will be found easily deducible from the same
principles.

Let me suppose two persons, (A) and (B), living in the same
neighbourhood, of the same rank and fortune, enjoying great superfluity,
but spending yearly the whole of their income in different ways.

Let the income of both be supposed to be 2100_l._ sterling; and let the
branches of their expence be ranged under six different heads. Let (A)
be supposed to spend upon the first 100_l._ on the second 200_l._ on the
third 300_l._ on the fourth 400_l._ on the fifth 500_l._ on the sixth
600_l._ in all 2100_l._

Let us suppose (A) to enjoy in every one an ample sufficiency.

(B), on the other hand, spends upon his first article 1600_l._ and upon
each of the other five, no more than 100_l._ Here the first article of
(B’s) expence is sixteen times greater than any of the rest; and by the
supposition, 100_l._ is supposed to denote an ample sufficiency upon
each article.

I come to (A), and I say to him, you disapprove of the extravagance of
your neighbour (B) upon his first article of expence, where he spends
sixteen parts of his income, and where you spend but one; and yet you
must allow that upon every other article of his expence, he is a better
oeconomist than you. Would it not be for your interest to bring the
other articles of your expence down to his standard, without increasing
any thing upon your first article, which is already within the compass
of what may be called sufficient.

To what purpose, says (A), would you advise me to so strict an oeconomy?
And what should I do with so great a saving on my annual income? Be in
no pain about that, I shall lay it out for you in discharging your
debts; in providing for your children, and giving them a good education;
in improving your estate; repairing your house; making up your
inclosures; all shall be usefully spent; and out of 600_l._ a year, you
shall have every thing necessary for your family.

Here is the representation of a scheme between a good statesman, and a
people whose interest he consults.

After the imposition of taxes, the individuals of a state, whose income
is already formed, begin to pay greatly more than they used to do for
every thing they consume. A great part of this additional price goes to
the public, and is thereby laid out for national purposes. The whole of
such expences are thrown into circulation, as much as if the rich
proprietors had laid it out upon articles entirely adapted to their own
taste.

Is it not evident, that in this way of appropriating the income of a
country, it must produce a more extensive encouragement to industry of
all kinds, than if the proprietors only had spent it? They never would
have thought of becoming merchants, or of setting up manufactures for
the supply of foreign markets: their whole expence would have been
calculated to supply their own wants; and it would have been indifferent
to them whether these were supplied by natives or by strangers.

Let us apply this doctrine to common experience. Let us compare the
nature of circulation in a trading town, with that of a country place,
where many gentlemen of large fortunes reside. How extensive the objects
of the first! how contracted those of the latter!

Let us compare again the exigencies of government, with those of a
trading city, what a variety of _new_ wants here occur to be supplied,
which the city never could have occasion for?

I have shewn that the great amount of taxes is taken from the income of
those individuals whose fortune is already made, or whose daily profits
are considerable: I have suggested how circumscribed the expence of this
class must be, when considered with respect to the employment it
procures to the body of a people. Does not the experience of former ages
show how apt private opulence is to sink into treasures, when a taste
for industry does not animate the lower classes to create new objects of
desire in the wealthy? Wherein is a state benefited by the luxurious
gratifications of the rich, unless it be by the employment they procure
for those who provide the objects of luxury? Those very gratifications
are, in one sense, taxes upon the rich in favour of the industrious:
they increase expence, and throw money into circulation. In Spain and
Portugal, where industry is not introduced among the lower classes, it
is the strangers who in effect levy such taxes upon them. Were the taxes
they pay, properly applied to the encouragement of the arts, instead of
being appropriated to private purposes, and to enriching private men,
whose taste for expence is always circumscribed to the objects of their
own wants, how soon should we see them vying with us in every market of
Europe, and supplying themselves as far as their country is calculated
for it.

The reciprocal wants of industrious nations, resemble the reciprocal
wants of tradesmen; all may be employed in supplying one another, as
well as themselves.

When the amount of taxes is properly laid out in premiums, for the
encouragement of the industrious, the prices of labour upon articles of
exportation, may be brought so low, that all nations who do not follow
the example, must languish and decay. Luxury at home will then cease to
hurt the trade of the nation. In her treaties of commerce, she may throw
open her ports to many articles of foreign consumption, without running
any risk by such allowances; and on the other hand, she will reap the
greatest advantages from a reciprocal permission.

The example I have given, by which I have illustrated the nature of
public contributions, must not be understood to tally with respect to
proportion. It would be both ridiculous and impossible to reduce all the
expences of rich men to the purely sufficient. All I meant was, to shew
how taxes, when properly applied, _may_ be considered as public
oeconomy; and how the levying of them has no direct tendency to hurt a
nation in point of ease and prosperity.


------------------------------------------------------------------------


                              CHAP. VIII.
                      _Of the extent of Taxation._


One good way to discover the nature of taxes, is, to examine how far it
may be possible to carry them. This is my intention in this chapter.

I have said that the object of taxes was income, and not stock. I have
shewn how those of the proportional kind affect the income of stock
already made, and persons who enjoy large profits upon their daily
industry. I have pointed out the impropriety of cumulative taxes, when
imposed upon such as draw nothing more from their industry than an easy
subsistence; and I have given a general preference to those of the
proportional kind; because they constantly imply both alienation and
consumption: alienation in those who _advance_ the taxes, _consumption_
in those who pay them.

Could, therefore, taxes be levied upon every alienation, where
consumption is implied, and that in proportion to the whole superfluity
of those who are to consume, proportional taxes would be carried to
their utmost extent.

I shall now analize this subject, in order to discover how far that
extent may reach; and by this inquiry, the principles of taxation will
be the better understood.

The objects of alienation comprehend all that is in commerce among men,
moveable and immoveable.

What is moveable is generally consumable, what is immoveable is
generally not so.

As consumption is a requisite, together with alienation, in order to
form a proper basis for proportional taxes, we see how contrary to
principles it would be, to tax the alienation of lands, houses, &c. in
the same proportion as consumable commodities. These are _funds_, not
_income_; and the money with which they are purchased, must be
considered in the light of a fund, while it is in the hands of the
buyer. When once it comes into the hands of the seller of the immoveable
objects, it frequently, indeed, partakes of the nature of income; that
is to say, it is spent in the consumption of fruits, and of the labour
of man; and then it will be affected by taxes.

This may suffice to recal to mind the principles we laid down in the
26th chapter of the second book, concerning the effects of the vibration
of the balance of wealth between the members of a modern state.

The next thing we are to consider, is the state of circulation. As to
that, we have frequently observed, how it must be in proportion to
alienation.

This proportion is not determined by the value, or denominations of the
money circulating; but by that value combined with the frequency of
transitions from hand to hand; as the force of a cannon ball is
estimated by the weight of the ball, and the swiftness of the motion at
the time it strikes.

Let us now lay aside the consideration of immoveable property; and
examine the nature of consumption, alienation, and sale, with respect to
other things.

Consumption comprehends every thing produced by the earth, or by man;
alienation is confined to that part which is exchanged between men; and
sale to that part of alienation which is exchanged for an equivalent in
money.

Whatever part is consumed without alienation, ought, I think, to be out
of the reach of proportional taxes, unless, by some circumstance or
other, it can be made to fall under the eye of the public, in a manner
_resembling_ its coming to market. Thus a tax upon malt is levied at the
malt-house, as if it were sold to the maltster, although it be made for
the consumption of the grower of the barley. In like manner, a tax upon
corn for bread may be levied either at the mill where it is ground, or
at the oven where it is baked[45].

Footnote 45:

  Examples of these kinds of taxes were familiar in former times.
  Vassals were obliged to grind in their Lord’s mill, bake in his oven,
  press their wine in the public press of the territory, &c.

  This was found very useful, in ages when alienation and sale were
  little known; but now they are considered as oppressive, and so I
  think they are, when compared with proportional taxes, which only take
  place upon the sale of the commodity: but still they are far
  preferable to many taxes of the cumulative kind.

The worst kind of proportional taxes are those which are levied upon
_private_ manufacturing, and upon unmanufactured consumption, where no
alienation takes place. An example of the first we have in the excise
upon malt, cyder, candles, &c. made in private houses for private use:
the last is known in Holland, where a man cannot kill his own pig, or
his own calf, without paying a tax. Were taxes of that nature extended
to the making of bread, cooking of victuals, &c. I apprehend they would
become of a nature more burdensome than any hitherto invented, unless
public cooks were established, as public ovens are in many parts of
France; in such cases, taxes might be levied upon every part of
consumption.

Investigations of this nature are so disagreeable, that it is with
reluctance I mention them; but when, in fact, such taxes are found
established in different countries, it is highly proper, that the nature
of them should be inquired into.

Taxes in Holland are so multiplied, as to descend to this category, in
many places, as we have seen by the example just given; but even these,
however oppressive they may appear to those who are not accustomed to
them, are still less so than many of the cumulative kind we have
mentioned, particularly the tax upon industry and the capitation in
France. They approach nearer to proportional taxes, and derive every
alleviation of their burden from that circumstance. He who pays such
taxes, sees that he can avoid them, by retrenching his consumption; and
when they fall upon the necessaries of life, he may draw them back,
providing he be an industrious man, and that every one who enters into
competition with him for employment, be equally subjected to the same
burden. But they are more burdensome than those where sale takes place;
because when a poor man, who wishes to consume, wants money, he
considers himself in the same light as if the thing were not to be sold;
but when he has that which he has acquired by his labour, and cannot
consume it for want of money to pay for a permission, as it were, he
must either starve for hunger in the midst of plenty, or be reduced,
perhaps, to beggary, for having preserved his life by defrauding the
tax.

What has been said, is, I think, sufficient to shew the varieties which
occur, when taxes are imposed upon bare consumption, where no alienation
takes place: they must, in every respect, be ranged under those of the
proportional kind, although some principal requisites be wanting to
engage any one to approve of their institution.

It appears still more difficult to establish a proportional tax upon
barter, or the exchange of commodities one for another, unless sale be
understood. This would be the case were a private person, not subject to
the excise upon malt made in his own house, to pay in that commodity. He
would not there escape the imputation of fraud; and might, with
propriety, be considered as a retailer. I do not, however, doubt but
examples of taxes upon barter might be found; some even occur to myself;
but they are almost too trifling to mention[46].

Footnote 46:

  Two gentlemen in France exchange casks of their wine, they are both
  obliged to pay a tax upon removing the wine from their cellar. This
  duty is called _Remuage_.

The last and principal requisite, to render proportional taxes easy and
light, is sale. There the burden must be proportional to the buyers
purse; and if it prevents the consumption of the thing taxed, the defect
will manifest itself.

Of these taxes we may say, that they are in proportion to circulation;
and accordingly, we see how difficult it was to raise them, so long as
circulation remained confined to the small quantity of coin in the
country. As money increased, both by the increase of trade and
alienations, they became more productive; and were the nature of them
rightly understood, and were they properly imposed, they would soon be
more generally adopted.

In treating of public credit, I have said that it is the duty of a
statesman to augment the quantity of money, in proportion as he intends
to multiply taxes on his people. I shall now, before I conclude this
chapter, explain the meaning of what was there thrown out relatively to
another subject.

The money of a country, we have said, bears no determinate proportion to
circulation; it is the money circulating, multiplied by the number of
transitions from hand to hand. Again, we have said, that the prices of
all things are determined by demand and competition. The meaning of
this, as it concerns the present question, is, that in proportion to the
competition of those who appear with money, in order to acquire what
comes to market, a larger or a smaller sum is brought into circulation.

Now, according to the principles laid down in the first chapter, we saw
how the full value of the industrious seller’s expence and profit were
made up to him in the sale of his work; and if he even advanced any tax
upon any part of his work or consumption, that it was refunded to him by
the buyer, who, if he consumes in the light of an idle man, pays for the
whole.

Farther, when a proportional tax is imposed, we said it was, in a
manner, as if the state interposed at the time of alienation, and
exacted of the purchaser a certain value in money, in proportion to the
commodity, as the price of the permission to acquire what his own
industry had not produced. From this I draw the following consequence,
that in proportion to the tax an additional sum of money is drawn into
circulation, which would otherwise have remained in the pocket of the
purchaser; consequently, on imposing proportional taxes, they cannot, at
first, exceed that proportion of money which is found in the pockets of
the consumers, over and above what they used to pay for what they
consumed.

The truth of this proposition is established upon many facts. First, in
countries where people keep their money locked up, proportional taxes
are very well paid. Hence the great amount of the _alcavala_ and
_cientos_ in Spain, which amount together to 14 _per cent._ upon every
consecutive alienation of the commodities, chiefly indeed for the
consumption of the rich.

Secondly, When excises were augmented in England, in the reign of King
William, Davenant tells us, that the price of the goods excised fell.

Thirdly, When a war has lasted any time in France, taxes cease to be so
productive.

Are not all these, and many other appearances, resolved upon the same
principle, viz. that taxes must come out of that money which exceeds
what was necessary for carrying on alienation before they were imposed?

In Spain they draw money from the chests of the hoarders, and increase
circulation for a while.

In England, during King William’s wars, the quantity of money being very
small, and trade being very low, the tax upon malt could come out of no
other fund than the price usually given for barley.

In France, people are better acquainted with taxes, and the great bulk
of excises are administred by the farmers, who never lower their price;
so that the diminution of the mass of coin diminishes consumption.

But when methods can be fallen upon to increase money according to the
uses found for it, taxes will continue to produce, consumption will not
diminish, and circulation will keep pace with them.

Could we suppose, that before the imposition of taxes, every person in a
state had laid it down as a rule, to spend the whole of his income, but
none of his treasure, in the consumption of what is brought to market,
it is plain, that in a luxurious nation, taxes might be carried so high
as to draw the last farthing of the treasure into circulation, even
though it were supposed to exceed the value which demand had fixed for
all that was brought to market. But without a luxurious turn this would
not be the case. There are countries abounding with coin, which it is
impossible to come at by proportional taxes. The reason is plain: the
value which demand fixes upon the total of the articles of consumption
exposed to sale in the country, bears but a trifling proportion to the
coin which remains locked up. This was the case in ancient Greece. In
that case, proportional taxes can never exhaust the treasure; because
were they to be made high upon articles of the first necessity, all the
poor would starve; if upon articles of superfluity, demand would stop.

Proportional taxes, therefore, can only be raised in proportion to the
desire of spending money; and as this desire depends upon the spirit of
the people, so must the extent of taxes.

Let me now trace a little the progress of money brought into circulation
by proportional taxes in a luxurious nation. I shall call the value,
fixed by demand, for all that comes to market (Y). The sum levied in
consequence of the alienation of it, or in other words, the sum of the
proportional taxes (X). And the whole money of the country (Z). This
premised, it will follow, from what has been said, that so soon as all
the money of the country is brought into circulation, then (Z) will be
exactly equal to the sum of (Y) and (X).

Let us next suppose the whole alienation to be made at once. Will not
(Z) then immediately appear divided into (Y) and (X)? What then will
become of those two sums which we suppose to enter into circulation at
the same time? I answer, that (Y) will go entirely free to the
industrious seller: that it is, or should be, nearly equal to the former
value of what came to market before taxes were imposed: and that (X) is
an additional sum drawn from the idle consumers, who live upon an income
already made. But suppose (X) to be augmented, until it exceeds the
quantity of money formerly superfluous for carrying on alienation: then
I say, that either taxes will become proportionally less productive, or
consumers must melt down the capital of their funds into paper money, to
the amount of the deficiency of (X); and this will supply circulation
with the additional sum required in consequence of the imposition of
taxes.

Now, I think, it is a lucky circumstance, that the additional sum of
taxes should be paid by those very people who are the best able to
borrow it upon their funds.

Let us proceed to examine the progress of (Y) and (X) as they continue
in circulation. (Y) is no sooner come into the hands of the industrious
seller, but he has occasion to go to market: that moment I consider him
as one of the rich; and the money which, at the time he sold, had
acquired the denomination of (Y), now resumes that of (Z). When he comes
to buy a commodity with what was formerly his (Y), there is immediately
a part of it converted into a new (X), and the remainder keeps the
denomination of (Y) in the hands of him from whom he buys. By this
progress it is plain, that after a certain number of alienations, or
transitions from hand to hand, the whole quantity (Y) will be converted
into (X).

Experience shews this to be the fact; because the amount of taxes, in a
short time, far exceeds the value of all the money of a country.

Let us next follow the progress of (X).

Upon the first alienation of any part of what comes to market for the
consumption of the proprietors of (Z), a proportional part of (Z) is
transformed into (X), and is carried into the public coffers. Were it
there to be locked up, and not thrown back into circulation, it is
plain, that in a short time the whole of (Z) would be converted into
(X), and would be shut up in the exchequer.

When the amount of taxes, therefore, is sent out of the country in time
of war, must not this produce a similar effect? Has not the exporting
that amount the same effect with the locking it up, since the one and
the other equally take it out of circulation? Does it not then follow,
that if more money be not obtained, either by borrowing it back from
strangers, or by melting down more solid property, that selling must
stop, and (Y) disappear as well as (X). The rich, therefore, must give
over buying, and the proprietors of all that comes to market must deal
by barter with one another.

How naturally do all these consequences follow one upon the other! and
how exactly do they correspond to the principles which run through that
part of the last book where we treated of banks and public credit!

Taxes are not raised, at this time, to remain in treasures, but to
answer the exigencies of the state. The moment, therefore, that the
money arising from them comes out of the public coffers, it loses the
character of (X) and resumes that of (Z), in the same manner that (Y)
was transformed into (Z), by being brought to market to buy a commodity.
This new (Z), as we may call it, no sooner returns into circulation,
than it becomes again converted into (Y) and (X), with this difference,
however, that what came from the exchequer, so far as it is converted
into (X), returns directly into it again.

Hence it follows, that states commonly pay their servants the full of
their salaries, and make them refund a part in consequence of cumulative
taxes, instead of proportionally diminishing what is due to them. And
when the salaries themselves are intended to be laid under poundage,
which in fact is an actual diminution of them, they choose that the tax
should appear to be a deduction out of what is supposed due; because it
seems less arbitrary to impose a tax, than to diminish a salary, without
assigning any reason for it; but indeed, besides this reason, it
commonly happens, that the particular appropriations and administration
of the revenue render that method easier.

With respect to proportional taxes they affect the expences of the state
in the same manner as those of individuals; with this difference, as we
have said, that the part (X) returns into the exchequer; but the part
(Y) is fairly spent by the state, as by the idle consumer.

From what has been said, we may gather the principles which lead to the
most extensive establishment of proportional taxes, viz. either to draw
by particular regulations, the whole real and gross produce of land and
work to market; or at least to bring it under the eye of the state, in
consequence of some modification or manufacture performed upon it, as
was observed with respect to malt-houses, mills, and public ovens. When,
by such contrivances, the whole gross produce falls under taxation, the
proportional taxes must be gently laid on, and gradually raised until
they begin to interrupt consumption; then they must be diminished for a
while, until dissipation increases; a case which will probably happen,
as it commonly keeps pace with industry.

If we suppose the rich to set out on a plan of living upon their
capitals, instead of living upon their incomes, as we have hitherto
supposed, then indeed taxes may augment to a degree not to be estimated.
This combination has already found a place in the 26th chapter of the
second book, where we examined it with regard to the progress of
industry. In that place it was said, that in proportion to credit and
industry, it might be possible in the compass of a year, to produce
commodities to the value of the whole property of the most extended
kingdom. Were that the case, to what a height might not taxes be
carried?

(Y) then would represent the whole value of the country, and
consequently, (X) would swell in proportion, according to the
competition among the inhabitants, to purchase every particular article.
Subsistence and necessaries might be taxed low in proportion to the
abilities of those of the lower classes; articles of luxury might be
taxed in a higher proportion, in order to draw the more into the
exchequer.

Were taxes thus carried to their utmost extent, still every person in
the state must be left at liberty to save, or to spend the whole, or any
part of his stock, or income; which is not the case when cumulative
taxes are imposed. Proportional taxes, tho’ carried to their utmost
extent, will not deprive an industrious man of his physical-necessary,
nor of the reward of his ingenuity, nor of that rank in wealth, to which
his birth or expence entitles him[47].

Footnote 47:

  A man’s rank, in a modern society, seems to be determined more
  according to his birth, or to his expence, than according to his
  stock, or income.

When taxes have the effect of interrupting this harmony of expence, of
restraining the liberty of squandering, or of saving, or of oppressing
one set of men more than another, in all such cases, they are improperly
imposed; and instead of being too high, as it is commonly supposed, I
think it is a demonstration that they are really lower than they need to
be. The classes of men in a modern state, resemble the horses in a team.
When every horse draws fairly and equally, the whole force is exerted;
but if any one happens to be strained by an overcharge thrown upon him,
the force of the team is greatly diminished.

When proportional taxes are carried to their full extent, I then presume
every one will be obliged to pay as much as possible; I do not mean that
every one will be forced to pay to the extent of his abilities, but I
say, that the generality will; and therefore, were cumulative, or
personal taxes, to be superadded on those who already pay all they can,
they would, by affecting them unequally, deprive many of their
physical-necessary, or small profits; and consequently destroy the
proper balance of their competition. The setting the lower classes free
from cumulative taxes, will only have the effect of putting the growing
wealth of the penurious and saving part of the industrious inhabitants
out of the reach of taxation. This ought in good policy to be done, as
has been shewn in another place. But, farther, we have observed, that
taxes can only be increased in proportion to the spirit of dissipation
in the people. To force money, therefore, out of the hands of those who
do not incline to spend it, is forcing the spirit of the people; and if
not tyranny, is at least great severity. Besides, we shall presently
shew, how these savings cannot escape being taxed, whenever they begin
to produce an income; and allowing that they may be greatly accumulated,
and thrown into trade, yet still they must in one way or other appear in
alienation, and become subject to the proportional taxes. The only part,
therefore, of the savings not affected by taxes, will be confined to
that which is locked up. This in a prodigal nation should never be
touched. The inconveniencies resulting to the state from so small an
inequality of taxation, is too trifling to be attended to, and too
difficult to be prevented.

I come next to examine the extent of cumulative taxes.

If we suppose the proportional taxes to be carried to their full extent,
there will be little place found for the cumulative, as has been said.
The only objects left for them are the savings locked up, and the pure
profits upon trade.

But let us suppose proportional taxes out of the question, as they must
be when contrary to the spirit of a particular nation; and then inquire
into the principles which regulate the imposition of cumulative taxes,
in order to discover to what extent they may be carried, and what
consequences may follow when they are brought to a height.

This branch has two objects; first, income, which is determinate;
secondly, profits from industry, which are and must be very uncertain.

Income, I divide into two sorts; that which proceeds from every branch
of solid property, capable of producing it: Land, houses, even cattle,
furniture, &c. all may, in some respects, produce an income, more or
less permanent according to circumstances. This sort of income is
established by lease. The second sort is the interest of money,
constituted by the contract of loan.

In imposing cumulative taxes upon income, it is very proper to consider
the nature of every species of it, with respect to stability. Landed
property is fixed, and can not escape taxation, were the tax to be
carried to the extent of the full income, as has been observed. Were the
same proportion to be laid on houses, they would soon fall to ruin,
because the annual proprietor would not keep them up. Like circumstances
must be attended to, in taxing every other article of revenue.

The method of ascertaining the value of this kind of property, is to
oblige all leases to be recorded, under a sufficient penalty. This is
the method in France, for the sake of the _controle_, which is exacted
upon recording them; and this, no doubt, facilitates the raising of the
twentieth penny, which operates upon all such incomes.

The value once ascertained, the whole income is at the mercy of the
state, in proportion to the impossibility of avoiding it, by any change
on the nature of the fund. It is from this circumstance that I call all
such taxes arbitrary impositions. And I call them also cumulative;
because the reason given by the statesman for imposing them, is, that it
is just every one should pay a general tax, for the support of the
state, in proportion to his abilities.

As these taxes cannot be carried beyond the value of the income which
the proprietor cannot withdraw from under the burden, we see the
impossibility of establishing them upon that income which proceeds from
money. If a tax of so much _per cent._ be imposed upon money lent at
interest; the lender may immediately call in his capital from his
debtor, and send it away beyond the reach of the tax. If the calling it
in be prohibited, then all credit is destroyed for the future, and no
more money will be lent. If the statesman should incline to profit of
the advantage found in securing money upon land-property; and if,
trusting to the desire monied-people have of settling their capitals in
that way, he should take one or more per cent. upon capitals so secured;
it will still have the effect of hurting the credit of landed men, who
have frequently no good security but their land to give.

It was formerly the practice to allow the landlords to retain a part of
the interest, in consideration of the tax they paid upon that part of
their land, which was pledged for the security of the money borrowed;
but when credit is once established, that regulation has no other
effect, than to oblige them to borrow so much dearer than other people,
who have no retention to claim. Where indeed credit is precarious, such
a regulation would be a premium for good security.

In general, I believe, we may safely determine, that all attempts to lay
a tax upon the income of so fluctuating a property as money, where the
capital is demandable, will prove unsuccessful.

The case is different, when the capital is not demandable, as has been
observed in the end of the 8th chapter upon public credit; where we were
suggesting a reason for taxing the interest of national debts, when
grown up to the full amount of all the income of a country. But a
material distinction was there made, between those debts which were
supposed to be consolidated into a permanent property, and new contracts
which were to be considered as debts upon that property.

We see, therefore, the extent of cumulative taxes upon possessions which
produce an income. Let us next examine how they may be made to affect
other articles.

We have observed how improper, and how contrary to principles it is, to
impose proportional taxes upon those branches of sale, which do not
change the balance of wealth between the contracting parties. Yet
cumulative taxes may then take place; because there is no reason to make
them general, or proportional.

When lands, for example, carry titles along with them, as is the case in
many countries; and when, as with us in Scotland they carry a right to
vote for a member of parliament, a very heavy tax might be imposed upon
the alienation of them. The same may be said of every other estate which
requires a feudal investiture to compleat the right. Thus the _Lods et
vente_ in France, which is a portion of the price of such lands due to
the superior or lord-paramount of the fee, amounting in many cases to
the sixth part of the price, is a hint for a cumulative tax to be raised
upon the alienation of this kind of property.

Were cumulative taxes properly laid upon personal service, a regularity
in levying them at short intervals, and according to some determinate
proportion, would do a great deal towards communicating to them all the
advantages of those of the proportional kind.

Thus a tax laid upon those who work by the day, may be levied in such a
manner as to be tolerably easy. A penny a day (or more if necessary)
paid by every industrious man, regularly, once a week, would soon enable
him to raise his price in that proportion. But then deductions must be
allowed for all accidental impediments; and were a plan to be concerted,
many other considerations would enter into it, which it would be
superfluous here to mention, and which, perhaps, may occur in another
place.

The two articles which, in analizing the extent of proportional taxes,
we observed had escaped that imposition, to wit, money locked up, and
the pure profits on trade constantly accumulated into the stock, are
equally ill adapted to bear a cumulative tax. I can see no way of taxing
money locked up, any more than money lent, without opening a door to the
greatest oppression. And as to the pure profits on trade, although they
appear to be income, I rather consider them as stock, which, according
to principles, ought not to be taxed. My reason for not considering them
as income, is because we have supposed them to be accumulated by the
merchant into his trading stock. They resemble the annual shoots of a
tree, which augment the mass of it, but are very different from the seed
or fruit which is annually produced, and is annually separated from it.
If they are spent by the merchants, then they are undoubtedly income,
and will be affected by proportional taxes; but as they may also not be
spent, and become stock, the cumulative tax will affect them in both
cases.


------------------------------------------------------------------------


                               CHAP. IX.
              _The consequences of an Abolition of Taxes._


Having endeavoured to deduce the principles of taxation, by examining
the combinations which occur when we suppose it augmented to the highest
degree, I must now look for new combinations, which will suggest
themselves upon examining the consequences of a total, or a partial
abolition of taxes.

So far as taxes are absolutely necessary for the support of government,
no body, I suppose, can wish to see them abolished. The object,
therefore, of a statesman’s attention in levying taxes for indispensable
national purposes, should turn upon the principles we have been
examining. What now follows relates to the consequences of abolishing
taxes once established, so far as it proves a revolution in the oeconomy
of a state. This will lead us to examine the consequences of taxes,
considered as voluntary public contributions, independently of the
absolute necessity of raising them to supply the exigencies of the
state. We are therefore to examine the consequences of so great a change
to the whole body of the society, considered as a nation, which requires
a public stock, to which it may have recourse upon every extraordinary
occasion.

When the interest of a whole people is examined with respect to taxes,
they may very properly be divided into the following classes.

1_mo_, Those who receive the amount of taxes, viz. the creditors and
servants of the state, and those to whom they give employment.

2_do_, Those who advance the taxes, viz. all the different classes of
the industrious.

3_tio_, Those who pay the taxes, viz. all the rich and idle; or, in
other words, all those who cannot draw back what they have paid.

In these classes are comprehended those who pay the taxes, and those who
receive the amount of them; consequently, in whatever concerns taxes,
the common interest of the whole taken together is what must regulate
the conduct of the statesman.

In order to determine this first and general question, viz. the
consequence of abolishing taxes relatively to the cumulative interest of
a whole state, it is proper to inquire,

1_mo_, What will be the consequence of abolishing taxes, relatively to
those who now receive the amount of them, viz. the creditors and
servants of the public, and those to whom they give employment.

2_do_, What will be the consequences of abolishing taxes relatively to
trade, industry, and manufactures: that is, whether these great objects
are carried on to most advantage, when every individual contributes
largely in providing a fund to be administred by a statesman; or when no
body contributes any thing, but when every one retains the whole of his
income, and the profits of his industry, and disposes of them as he
thinks proper.

3_tio_, What will be the consequence of abolishing taxes, relatively to
that part of the people who now complain that they are forced to
contribute to every tax, although by their exclusion from the emoluments
of lucrative employments, they bear a greater burden than others not
better entitled to exemption, who thereby profit at their expence?

To determine so intricate a question, several combinations of
circumstances must here be examined, and from the particulars resulting
in every case, we shall, towards the end of this chapter, endeavour to
point out the general conclusion. I begin by examining the consequences
arising to the creditors, and to those who serve the state, from the
cessation of those expences which flow from the produce of taxes, either
in paying the interest of debts, or in defraying the whole _actual_
expence of government.

As to the creditors, this question has been already discussed. We have
seen that the withholding the interest due to them would have the
consequence of bringing on such a convulsion in the state, by the breach
of faith, and ruin of public credit, as would throw every thing into
confusion. But with respect to the servants of the state, we must
inquire, whether the raising taxes for defraying this article of expence
be more hurtful to the people in general, than the consequences of such
a revolution in circulation and employment, which would follow, if the
taxes were to be suppressed, and the servants employed by the state
dismissed.

When the necessity of raising taxes is out of the question, the hurt
they do in general to a country is when, by the imposition, the money is
taken out of those hands who would have employed it for the advancement
of the prosperity of the state, in order to throw it into those who will
employ it otherwise. From this let us now draw some conclusions.

1_mo_, That if money be taken from those who would have employed it in
feeding themselves, and in continuing their industry, the cessation of
such a tax is in a manner giving bread to those who are starving.

2_do_, If money were to be taken from those who, having more than bare
necessaries, would, by its use, increase the demand for domestic
industry, and were that money bestowed on a set of men who would employ
it in the purchase of foreign commodities; the cessation of taxes, in
such a case, would, so far, take the bread out of the mouths of
foreigners, and give it to our own countrymen.

The abolition of the first species of taxes is advantageous to a state
in every combination, let the money arising from it be ever so well
employed. As to the second species, the abolition is not necessary;
because the vice lies only in the misapplication of the amount.

Let us then suppose taxes to become unnecessary, and all those of the
hurtful kind, depriving the industrious of bread, and enriching
foreigners at the expence of citizens, to be taken off.

Suppose that after all, there should still remain more taxes than are
sufficient for supplying all the necessary charges of government, when
administred with prudence and with oeconomy, and that this surplus is
bestowed in gratifying individuals, beyond the value of all the services
they do the state: I ask whether this superfluous expence is immediately
to be cut off, and taxes diminished in proportion; or whether it would
not be more proper to let the taxes subsist, and to think of a better
method of applying the amount of them?

I answer, that according to the state of the question, the body of the
people, who are all made to contribute towards the enriching of a few of
their number, may justly complain of the inequality of their condition,
and have a title to demand an abolition of their taxes, unless it can
evidently be made appear, that by granting their request, there would
follow a prejudice to the state, which would affect their own interests
as individuals.

To discover how far this may be the case, let us form as many
combinations as we can, relative to the effects of diminishing taxes,
and candidly examine the most natural consequences of every one. If we
find that the mass of a people gain, in general, more than they lose by
paying taxes imposed with moderation and propriety, and still more if it
appears that their ease and prosperity depend upon the levying and
expending of such taxes; I think we may conclude, that all diminutions
of them which hurt the interest of the greater body, are in general
hurtful to the society.

Let me first suppose a general reform of all unnecessary expence to take
place at once, and a proportional abolition of taxes to go hand in hand
with it. Would not all those who at present subsist by the superfluous
expences of government, be reduced to misery? Would not all those who
supply unnecessary wants, equal to the whole amount of the taxes
suppressed, be forced to be idle in proportion? The millions who
contribute in paying those sums would be differently affected. Those who
pay out of a fixed and certain income, would feel an immediate benefit
from it; those who contribute by proportional taxes would also be
gainers, providing they be of the idle class; but all the industrious
would lose in proportion, if the prices of subsistence should not fall
with the diminution of their taxes. All the manufacturers of exciseable
goods, who had been used to _advance the taxes_, as we have observed,
would gain considerably. For the diminution of the taxes would be total
as to them, though not to their customers; because traders would never
want pretences for keeping up the price of their commodities beyond the
proportion of what it ought to be, when duties are taken off.

I decide with the greater certainty as to this particular, from the
analogy it bears to the consequence of changing the denominations of the
coins in France, which long experience shews never to have the immediate
effect of regulating prices proportionally.

But as we are here considering the consequences of a sudden abolition of
taxes, let us, for a moment, consider, with an eye of humanity, the
scenes which would unavoidably open to our view, both in the formerly
opulent habitations of those who were wont to wallow in public money,
and in the comfortable dwellings of many others of every denomination,
who, either as the reward of merit, or as the recompence of painful
industry, had supplied the wants of useless armies, navies, arsenals,
dock-yards, &c. formerly paid out of taxes, now abolished, and who
thereby had subsisted and brought up their families.

Are not all these children of the state? Have they not had fathers and
mothers who have been greatly relieved by procuring such outlets for
them? Have they not children who are educated and brought up with the
amount of their salaries, and profits of their service? Have they not
had people of every class of industry, who have gained their bread by
providing for their wants, while they were supplying those of the state,
now become superfluous? In one word, does not the money they receive,
circulate and return to the grand river, as I may call it, in the same
manner as that of other members of the state?

For these reasons, I say, that taxes once properly imposed, and brought
to circulate through a certain channel for a long time, cannot,
_suddenly_, be suppressed, without occasioning far greater misery and
distress than can arise from them, when levied with any degree of
intelligence. This is nowise peculiar to the suppression of taxes; it is
equally the same, in every sudden revolution of property. When the
Templers were universally rooted out of Christendom, who doubts of the
afflictions, misery, and distress, which followed to every class of
inhabitants employed by them, in every kingdom in Europe? Could so large
a consumption as that of so great an order cease at once, without
drawing along with it numberless inconveniences? Did not the reformation
itself, otherwise so great a blessing, starve a multitude of poor who
were fed by the monastries? Did not the secularization of so many
ecclesiastical benefices do great prejudice to many families, by
blotting out an infinity of ways of procuring an easy livelihood for
their children? Let those who do not feel the truth of what I here
advance, examine the state of the protestant nobility in Germany, where
you find the same hardships still subsisting, though in a degree much
inferior to what it must have been at the time of this sudden
revolution, which took bread from thousands of the younger sons of noble
families.

Such revolutions have happened; such inconveniences have been felt: but
they were not the deliberate act of any particular statesman. They were
the effect of those convulsions which the human passions occasion. No
body can justly impute them as necessary consequences of a reformation
in religion. But let any statesman now, from a cool reflection upon the
unnecessary load of employments in church, state, army, navy, finances,
and law, and from a principle of distributive justice, abolish _at once_
all that is superfluous, and the taxes, at the same time, out of which
the emoluments arise, he will very soon set before the eyes of his
people, such a scene of compassion, as will quickly blot out the
remembrance of the favour.

We should not then find some individuals reduced to want, but numerous
families; not a parcel of beggars starved, but industrious
manufacturers; not a set of ecclesiastics, who from their state of
celibacy and retreat, appeared already, in a manner, separated from the
commonwealth, but a multitude of people connected by marriage, by
society, and by all the tender bonds which unite mankind. Such a scene,
I say, would not fail to excite compassion in the heart of those very
men in whose favour the desolation was to be brought on; and the
statesman would thereby lose the whole merit of his ill judged zeal for
distributive justice, and be considered in the most unfavourable light
that passion or prejudice could suggest.

This is a digression introduced with no intention to favour a
misapplication of public money, but to point out how far a reformation
in this particular is a delicate operation.

A good physician never attacks a disease by violent remedies, when mild
ones, with time, may be made to produce the same effect. Nothing can
resemble an ingrained disease in a human body, more than an ingrained
vicious habit in a state. The spirit of a nation is influenced, as has
been said, by the administration of its government. So large a sum of
misapplied money creates a political disease, which must be purged away
by degrees; and new doors must be opened to receive those whose former
method of subsistence is thereby intended to be cut off.

Let me next examine the consequence of a gradual and insensible
reduction of taxes, relatively to trade, industry, and manufactures.

It would be both tedious and superfluous to trace the steps by which
such an operation ought to be conducted. Let me suppose it compleat; but
let it not be so very gradual as to blot out all remembrance of the age
of taxes, and of their effects.

We have sufficiently analized the whole progress of circulation; we have
shewn how it must constantly be in proportion to alienation, and how,
when deficient, industry suffers a check. Even when peace is restored
after an expensive war, we have shewn how circulation diminishes, from
the abatement of public expences, how money stagnates, and how it is
consolidated upon property of a more permanent nature.

Let us now apply these principles to the question before us. Let taxes
be abolished ever so gradually, the circulation of the exchequer must
cease in proportion; consequently, the whole alienation, and the whole
industry which is the object of that alienation, must cease also. The
money issued from thence at present, continues its progress from hand to
hand, and all is found necessary for circulation, in this age of
taxation, as we have called it. What a deal of industry is implied in
the circulation of a sum equal to all the taxes! Let those who choose to
calculate, state the following proportion, because I will not here
interrupt my subject.

As the whole money of the country is to all the alienations performed by
it, so is the sum of taxes to that part of alienation which will fall
with them.

If a gradual diminution of taxes must have the effect of extinguishing
so much industry, it will have the effect of starving the industrious
who lived by it. But before they starve, the price of work must fall
below the price of the narrowest subsistence: because the never failing
foreign demand for subsistence, will keep it above the rate of their
slender abilities, as long as any trade remains.

To imagine a foreign outlet for cheap manufactures, while the
subsistence of workmen is at par with other nations, is against all
principles; as it is against experience, to see a country without
revenue, and without taxes, carrying on with success the operations of
industry and foreign trade.

Compare, therefore, the situation of such manufacturers with those in
the age of taxes. Compare those who would augment a supply far beyond
all the demand for it, with those who are paying large taxes, and as
regularly drawing them back, either upon the sale of their work, or in
consequence of wages which enable them to be idle two or three days in a
week.

In such a situation, how ardently would the former wish to see the idle
consumers furnishing again a copious supply of money to government, for
removing such inconveniences. They would then quickly perceive that they
had not been of that class which had felt the load of taxes; they would
recal to mind the joyful hours they had spent in public houses; the
fortunes which every industrious man might hope to accumulate, while
every branch of industry was kept alive, by the means of a copious
circulation.

If, therefore, the industrious classes of a people cannot be benefited
by an abolition of taxes; let us next inquire, to whom the advantage
would accrue.

It has been said, that the idle consumers pay all taxes of the
proportional kind; the proprietors of lands, houses, &c. bear every
where a very large share of taxes both proportional and cumulative. This
class of men, therefore, are those who bid the fairest to reap a benefit
from an abolition of them. But the proprietors of lands are by no means
included in the class of idle consumers, in every respect; altho’ they
may be considered in that light, with respect to such taxes upon their
consumption as they do not draw back from their direct industry, in
producing some manufacture which they may sell again, with a profit
proportional to the tax they paid. They are masters of a property,
which, in a country of industry, is daily augmenting in its value. Their
fortunes, often swell faster than those of any one class of the
industrious; but they augment by annual income; the fortunes of all the
rest, increase by the capital. Every penny raised in a landlord’s rent,
is equivalent to half a crown gained by a merchant.

If it be true that taxes, rightly imposed, do no prejudice to any of the
manufacturing, or any-wise industrious classes of a people; and if it be
true, that an abolition of those taxes, by contracting circulation,
would discourage industry; then we may determine that the landlords
would lose much more in finding the improvement of their lands
interrupted, than all they can gain by adding their taxes to their
present fortunes.

Combinations of this sort are so involved, that I cannot pretend to
unfold them step by step, as might be done in cases of a more simple
nature. The conclusions therefore drawn from researches of this kind, do
not command that assent, which we find in a manner extorted from us upon
other occasions. In this chapter, I have not undertaken to demonstrate
that the judicious imposition of taxes is advantageous to a country in
every respect. My view is to point out the advantages they actually
have. The common opinion is that they are hurtful. Our feelings,
however, have raised doubts with many great men concerning the truth of
that proposition. If my investigations, however imperfect, and however
liable to objections, should facilitate to others the clearing up a
point, which is beyond the reach of my capacity to extricate, this
consideration will be a sufficient encouragement for me to proceed.

Let me, therefore, lay aside the thoughts of analizing the effects of
taxes, with such accuracy as to form a demonstration of their being more
beneficial than hurtful to an industrious nation, and that the throwing
them back into circulation does more good, than the raising them does
harm. But let me shew, in general, that the interest of landed men, who,
I think have, beyond all doubt, been proved to be those who, in the
first place, pay a considerable part of proportional taxes, does by no
means require an abolition of them.

The proprietors of lands, whom we have hitherto considered as being of
the class of the idle consumers, advance their rents by the great demand
produced for subsistence, in consequence of industry. This, if it does
not raise the price of subsistence, keeps it, at least, at an equal
standard; and that standard must bear a proportion to what it is worth
in other nations, as long as trade subsists. But let trade decay, let
domestic industry fail, it will not be the foreign price which will then
support the rate of our markets. What a multitude of circumstances
contribute to the exportation of our superfluity! I can send from
Charing-cross, any parcel whatever, to the distance of fifty miles,
cheaper than from my own country habitation, where I can have a man,
with a cart, for two shillings a day. From Charing-cross, I can send, at
an hour’s warning, many thousand tuns weight: here I could not do the
same in many weeks. Near London, an extended common may be inclosed and
improved in a season: here, the improvement of a small field is the
business of a man’s life. Let me even consider how matters are changed
within these fifty years. Undertakings which now are executed with
little difficulty, were then absolutely impracticable. An army was
necessary thirty years ago to make a road of a hundred miles, and the
inhabitants were astonished at the execution of it[48].

Footnote 48:

  Wade’s road through the highlands of Scotland.

Were it necessary, at this time, to do as much every year, if money be
but provided, hands will not be wanting, either to conduct or execute
the plan.

The number of people, _well employed_, makes the prosperity of a state;
and the profits of the opulent classes, by the augmentation of industry,
more than compensates all the burden of their taxes. They grow in
relative wealth; and the acquisitions they make, are commonly exempted
from the cumulative taxes raised upon their possessions. In proportion
to their industry in improving their lands, their fortunes augment. The
present system of taxes does not interrupt their operations. Were any
great change in that particular to take place, which might sink the
market prices of subsistence, even allowing that it would prove an
advantage to foreign trade, they, I am sure, would be the first who
would feel the inconvenience.

It may be wondered, why I have not suggested, as a consequence of taxes,
the increase upon the price of the earth’s productions, which is a
direct indemnification to all the landed interest, more than equivalent
to the taxes they pay. But taxes upon land, do not augment the price of
grain, as they raise the price of exciseable goods. The reason is plain.
The tax upon land affects only the proprietor’s share of the produce of
his lands: were he to attempt to raise the price of his grain, in
proportion to the tax he pays, his farmer, who pays no land-tax for his
portion, would undersell him in the market. A tax never can raise a
price, except when it is laid on so universally, as to make it
impossible for any person to avoid it, who sells in competition with
another who pays the duty. It is from this principle that smuggling
often ruins fair traders: the smuggled goods are sold cheaper than those
which pay duty, and the fair trader is thereby forced to sell below what
he can afford.

On the whole, I believe that when this question is thoroughly
understood, it will be found, that taxes affect prices far less than any
one could imagine; except in the case of excises, rightly imposed, and
levied without fraud. There indeed they have their effect; but in every
other mode of imposing them, I am apt to believe that they do not
produce the consequences commonly ascribed to them. I have already
suggested the reason in a former chapter upon this subject; where the
influences of competition in the markets where commodities are sold, has
been proved to work more irresistible effects in regulating the price of
work in general, than any thing that taxes, not immediately imposed upon
the very article of consumption, can produce. But if in spite of all
that has been said, it should be urged that the prices of labour and
manufactures rise in proportion to taxes, I answer, that the
difficulties resulting upon this hypothesis, would be many more than
could be objected to the other theory. Could, for example, any man
assign a reason why a pound of the best snuff in England should be sold
dearer than in France, where it pays a duty of above two shillings
sterling; why many articles of manufacture can be afforded cheaper in
England, than in Scotland, where taxes are certainly lower, and although
a day-labourer in the first be paid a shilling, and in the last little
more than eight pence; why subsistence should be absolutely dearer in
Scotland than in England, taken upon an average; why universal
experience should prove, that when the price of subsistence is raised by
scarcity, work instead of rising, is constantly lower than at other
times?

From all these appearances, added to the arguments I have used to prove
that taxes are not prejudicial to industry, I conclude, that the theory
I have attempted to give is just in the main; and that when taxes are
judiciously imposed, and actually levied without oppression, they enrich
a nation.

1_mo_, By putting into the hands of a good statesman, the means of
removing every abuse; of rendering the state respected by its enemies;
of supporting every class of industrious inhabitants, when their
particular branch falls under distress; of providing an outlet for many
young people, who in time become ornaments to their country, and
instruments of her defence; of supporting foreign trade by bounties on
exportation; of encouraging the improvement of lands, the establishment
of colonies, the extension of fisheries, and every other scheme for
augmenting the production of subsistence and manufactures.

2_do_, That the multiplication of taxes, exclusive of the encouragements
just mentioned, which are bestowed gratuitously on trade and
manufactures, do, of themselves, and independently of the proper
application of their amount, augment, demonstratively, the mass of
circulation, alienation and industry; and in this respect may be
considered as a voluntary contribution, in the first place at least,
from the rich who pay them, to the industrious who directly draw them
back.

3_tio_, As to that part of the people, who pay their taxes without
sharing the advantages of those who serve the state in lucrative
employments, I say the industrious part of them pay nothing; and the
demand for what they produce, is greatly increased by the expence of
those very men who are the objects of their envy: and farther, that if
an alteration were to be made on the revenue, by any abolition of taxes,
those who imagine themselves hurt at present, might find, by sad
experience, a much greater, and much more real hurt, from what would
disturb the harmony of the present system.

To conclude, we have a tolerable notion of the state of industry in
former times, when taxes were little known: we may see the progress it
is making in countries where, at present, impositions are comparatively
lower than elsewhere; and we may compare the state of those countries
with our own, as to ease and happiness. From such inquiries, nothing, I
apprehend, can be concluded in favour of the progress of industry, from
an abolition of taxes.

That such an abolition may produce some good effect, as yet unknown, I
shall not pretend to deny: we have not lived long enough to see any
experiment of this kind put in practice.

From the exposition I have given of this matter, there arises a great
difficulty to be solved.

Taxes are paid, no doubt, and no body according to this theory seems to
pay them. The industrious draw them back; the proprietors of land and
solid property are said to be indemnified; prices, it would appear, are
not to fall by a diminution of taxes, in favour even of the most idle
consumer; they are not made to rise in consequence of an augmentation on
them: Whence then do taxes proceed? From what fund do they arise? What
interest do they affect? I can solve all these difficulties, by an
answer to another question. From whence arises the value of a small
parcel of flax, when wrought into fine lace? It arises from the price
paid for time well employed; which produces nothing when spent in
idleness. This is the fund out of which the greatest part of taxes is
paid; it is a fund created by the industrious Britons, which I hope will
increase for many centuries, tho’ taxes should increase in proportion.
It is worth more than ten times all the taxes which could be raised, and
all the landed property without it. Let that time be spent in idleness,
and the whole produce of this island would not supply the expences of
government for a month.


------------------------------------------------------------------------


                                CHAP. X.
            _Are taxes a spur to industry, as some pretend?_


It is not easy to find out, _a priori_, how taxes should prove a spur to
industry. What makes several people adopt this opinion is their
feelings, in consequence of many circumstances arising from experience,
rather than what reason, or the nature of the thing has pointed out. But
as nothing can be produced without an adequate and natural cause, it is
proper to examine this political problem, by an application of the
principles we have laid down in the former chapters. If these be just,
we shall discover by them, how it happens that in countries where taxes
are high, where living is dear, and where every circumstance seems to
render the means of subsistence difficult to obtain, people live in the
greatest plenty, are best and most easily subsisted, and that industry
there makes the greatest progress.

For the solution of this question, let us call to mind the principles
which influence the multiplication of mankind, and the increase of
labour and industry, laid down in the first book. We there explained how
the wants of mankind promote their multiplication.

Money, the instrument of alienation, was represented as the primum
mobile in this operation; a desire in the rich of acquiring every thing
with money, that is _demand_, was shewn to be the spur to industry in
the poor. It was said, that if riches did not inspire a taste for
luxury, that is for the consumption of the labour of man, these riches
would not circulate; and that they would then be adored rather as a god,
than made subservient to the uses of men.

Connect herewith that the imposition of taxes is a method of bringing
money into circulation; that those of the proportional kind have the
effect of drawing from the rich, an additional price upon every thing
they buy, which goes for the use of the state, and which otherwise would
not have entered into circulation at that time.

From these principles, I conclude, that taxes promote industry; not in
consequence of their being raised upon individuals, but in consequence
of their being expended by the state; that is, by increasing demand and
circulation.

From the principles above laid down, I cannot discover the shadow of a
reason, to conclude that the taking arbitrarily away from some
individuals, a part of their gains by cumulative taxes, or
proportionally from others, by augmenting the price of what they buy and
consume, must in any respect imply an incitement in the consumers to
demand more; and without this it never can excite the industrious to
augment the supply.

I readily allow that every one who has been obliged to pay a tax, may
have a desire to indemnify himself of the expence he has been put to, by
augmenting his industry; but if on the other hand, taxes have put every
one to a considerable additional expence, in proportion to his estate,
it would be absurd to allege this diminution of his fortune, as the
cause of a desire to augment his consumption.

Examine on the other hand, the use made by the state of the money
raised, and you will easily perceive the justness, I think, of the above
mentioned principles. This money belongs to the public, and is
administred by private people. Public expence is defrayed with a full
hand; they who bestow the money, bestow it for the public, not for
themselves; and they who work for the public, find, or ought to find,
the greatest encouragement to be diligent.

Every application of public money implies a want in the state; and every
want supplied, implies an encouragement given to industry. In
proportion, therefore, as taxes draw money into circulation, which
otherwise would not have entered into it at that time, they encourage
industry; not by taking the money from individuals, but by throwing it
into the hands of the state, which spends it; and which thereby throws
it directly into the hands of the industrious, or of the luxurious who
employ them.

It is no objection to this representation of the matter, that the
persons from whom the money is taken, would have spent it as well as the
state. The answer is, that it might be so, or not: whereas when the
state gets it, it will be spent undoubtedly. Besides, had it been spent
by individuals, it would have been laid for the supply of private wants,
which are not near so extensive as those of the public: and farther,
when money is so taken from rich individuals, it obliges them to find
out a way of procuring more, out of their solid property; and when this
facility is not procured for them by their statesman, we see how taxes
become both oppressive and ill paid. On the contrary, when it is
provided, either by the returns of foreign trade, which greatly augment
the coin of a country; or by banks, which melt down property into paper
circulation; we see taxes augmenting constantly, without creating any
impediment to consumption, or discouragement to industry. All these
consequences hang in a chain, and hence the solidity of the principles
upon which they depend may be gathered.

After this solution of the question proposed, let those who are versed
in history combine circumstances, and examine whether facts do not prove
the truth of what I have said.

During the time of the Roman empire, when the riches of Asia flowed into
the coffers of Rome, and were constantly exhausted by the prodigality of
the emperors, we perceive, from many circumstances, to what a degree the
consumption of superfluities augmented. The price of certain commodities
rose to an excessive height; industrious people, of the lowest
extraction, were daily seen to amass prodigious fortunes: these are
proofs of circulation. But when we consider the expences of a Lucullus,
or of a Crassus, who consumed, it is said, the work of ten thousand
slaves, and compare the consequence of that consumption with the expence
of a modern, who should consume the industry of ten thousand freemen, we
shall find a wonderful difference in the effects of the one and of the
other, with respect to circulation, and the encouragement given to
industry.

There was no alienation between Crassus and his ten thousand slaves,
notwithstanding all the work consumed; consequently, the only
circulation implied by this consumption was in proportion to the
necessaries which the master was obliged to purchase for so great a
multitude: and if we still suppose all those necessaries to have been
produced by their own labour, then the state of Rome could not, but by
an arbitrary imposition laid upon Lucullus and Crassus, draw one
farthing out of their coffers; consequently, industry could not increase
in proportion to the loads of wealth brought from Asia by those
generals. Whereas were Lucullus now at London, or at Paris, he would not
be able to spend a shilling, without giving a penny, and perhaps more,
out of his treasure to the state, which would immediately throw it back
into circulation.

As we are now on the subject of circulation among the ancients, let me
briefly trace the progress of it in Europe, through different
modifications, to our own times, and so close this chapter.

When the seat of empire was translated to Constantinople, and all the
Asiatic provinces attached to the Emperors of the East, a stop was put
to the augmentation of coin and bullion in the empire of the West. A
considerable part of what had formerly been there returned to
Constantinople, and the remainder fell a prey to the barbarous nations
which overran it. This may be called the first period.

These barbarians, by enslaving all the ancient inhabitants, and by
forcing them to perform every kind of service, must have had little use
for coin. What they coined appears to have been broad and thin.

Let any one reflect upon the insensible waste of silver plate, and the
still greater loss on coin which circulates; the vast sums carried off
in the time of the Croisades; the quantities buried or thrown into
rivers in times of devastation; and add to these circumstances, that
from the fifth century after Christ, till the discovery of the Indies,
there was, probably, little or no silver or gold brought into Europe;
and it will appear very natural, that coin should have been at that time
much more scarce than formerly.

How contracted circulation was during the 13th and 14th centuries, may
be gathered from the anecdote concerning alienation in France, mentioned
in the third chapter upon public credit.

But farther, the great subordination established by the feudal form of
government, and the military services to which such numbers were bound,
had the effect of preserving the ancient simplicity of manners, so
unfavourable to industry. The consequence was, that Princes could raise
no taxes; and that all the money the people had was locked up in their
chests. We know there were in those days abundance of wealthy people;
but their wealth inspired them with no disposition to consume at the
expence of ready money.

The discovery of the Indies opened a third period, and threw great
riches into the hands of the Spaniards: the house of Austria was the
first enriched, and appeared with great splendor for some time. Charles
V. by his extensive dominions, had an opportunity of distributing this
new gotten treasure among his subjects in Flanders, his native country:
this set industry to work in that quarter. The Portugueze discovered the
East Indies: a new enticement to luxury; a new motive to become
expensive. The Hollanders became a trading people, and with the money
which their industry had drawn from the magnificent Spaniard, they shook
off his yoke. Money insensibly began to circulate. Princes immediately
found, as has been said in the second book, that it was necessary for
them also to augment their revenue, in order to maintain a proper
superiority over their subjects in point of riches. The increase of
circulation among individuals made it more easy to raise taxes; and the
throwing the amount of them back again, in gratifications to the chief
people of the state, engaged those who came by money in a manner
gratuitously, to expend it as freely as they received it. No wonder,
then, if Princes found it an easy matter to load their subjects. They
were supported in this scheme by the great men of the state, who found a
benefit from it. This revolution has totally changed the face of affairs
in the present period of circulation. Courts are splendid; armies are
numerous; buildings, in cities and in the country, are magnificent; an
old city, compared with a new one, appears hideous; all public works are
carried on with that solidity which we admire in those of ancient
Princes and states, when nations led into captivity were employed to
perform them. In those days the magnificence of Princes was in
proportion to the groans of their subjects; now they are in proportion
to their wealth and ease. Whence proceeds the difference, the effects
are the same? From good government, and a well regulated political
oeconomy.


------------------------------------------------------------------------


                               CHAP. XI.
 _Considerations upon Land-Taxes, with some Observations upon those of
                          England and France._


Of all the kinds of cumulative taxes, that which is properly imposed
upon lands seems the best: that is, it implies the fewest inconveniences
to the persons paying, and to the state in raising it. That it is an
unequal imposition is plain and certain: this character is unavoidably
attached to every species of cumulative taxes, in one way or other. It
has also the effect of casting a general discredit upon the purchase and
improvement of land; because the proprietors are naturally exposed to
augmentations, which may, almost with the same ease, be carried to the
total amount of the income, as to any proportional part of it. This has
been mentioned in a former chapter, where the interest of a nation’s
debts was supposed to increase so as to equal the value of all the
land-rents, and the whole revenue of individuals.

Land-taxes are imposed in various forms in different countries, and all
are supposed to bear a determinate proportion to the rent. This,
however, is never, nor indeed can it ever be the case. The value of land
is varying perpetually, from the industry of the inhabitants. Besides
this inequality, there are other inconveniences proceeding from the
unequal distribution of property. In Scotland, for instance, land is
divided into large portions; very few small lots are to be found. The
class of farmers, for the most part, labour the lands of others, who
have large possessions. This is less the case, I believe, in England,
and still less in France and in Germany. A land-tax, therefore, being
supposed universal, would, in Scotland, do little harm: in England, it
falls heavier upon the small proprietors; because the sum exacted bears
a greater proportion to the supposed superfluity of the proprietor. In
France, it is still worse; for there the exemptions of the numerous
class of nobles, and many other circumstances mentioned above, entirely
destroy even the shadow of proportion. It is out of my way to enter into
any long detail upon this head, with respect to different countries.

I shall therefore confine myself to a very few observations upon the
method of laying this tax in England; and upon a project which has been
long in agitation in France, to raise their land-tax by way of tithe
upon the fruits.

This scheme was first proposed to the late King of France by the
_Marechal de Vauban_, in 1699, and the proposal was renewed some years
ago in a performance called the _Reformateur_. But as it would prove
hurtful and burdensome to France, in a great degree, from a circumstance
which has not been attended to, the examination of this system of
taxation will serve as a good illustration of this part of our subject.

The land-tax in England has, in my humble opinion, two remarkable
defects. First, The sums imposed at so many shillings in the pound[49]
upon every district of the kingdom, whether cities, towns, universities,
or open country, even upon the King’s palaces, inns of court, &c. are
not distributed according to any rule of proportion upon the property of
individuals; but this operation is left to assessors.

Footnote 49:

  That the assessments, in the annual act for the land-tax, are
  generally understood to be at the rate of 1, 2, 3, or 4 shillings in
  the pound, is true; but it is to be observed, that no such rate is
  mentioned in the statute with respect to real estates or land. The
  rate of a certain number of shillings in the pound occurs only with
  regard to personal property.

Secondly, All personal estates, except property in the public funds, and
stock upon land, supposed necessary for agriculture, are charged in the
same proportion as land-rents.

I shall now point out the inconveniences and bad consequences of these
two capital defects.

When a tax is imposed at so many shillings in the pound upon the income
of a whole district, every article of the property which produces it
ought to be specified. If this be omitted, there is a legislative
authority vested in those who make the distribution.

The articles which compose the whole property, and the revenue of each
article being once determined, the state has it in its power to impose
the tax according to what proportion it thinks fit; of one, two, or more
shillings in the pound. But then, in favour of the contributors, the
different articles which produce the supposed total, ought either to be
specified in the law, or reference should be made to a book of valuation
where they are recorded.

It is no easy matter to frame the valuation of all the property of a
country: and it is a scheme I should be very far from proposing, unless
the spirit of a nation took such a turn as to wish for it. But where a
determinate sum has been in use to be levied upon a certain district, it
does not appear so difficult to make a proportional distribution of it
according to equity, and to adhere for the future to that distribution,
considering it as a _proportional_ valuation, if not a _real_ one. This
is done every year, and without it no such tax could be raised. But when
annual distributions are made, discontents constantly arise; and the
pretended equality thereby observed, produces worse effects than the
inequalities which would follow from the other scheme: because the
change in the relative value of possessions would then be chiefly owing
to the industry of every proprietor in improving his lot.

How valuations in England were made originally I cannot tell[50]; but in
Scotland, it is very certain, that as to lands they were all set down in
a book of valuation at their supposed rents at that time. So let the sum
raised be what it will, every man at least knows that his proportion
must be according to his valuation in the general register.

Footnote 50:

  There is no vestige in the history of England, since Dooms-day book,
  of any regular valuation being made of all the _lands_ of the kingdom,
  nor of any tax imposed, _singly_, on that branch of property.

  The subsidies, monthly assessments, and pound rates, in the different
  stages of the monarchy, have all been mixed duties; composed of a
  charge upon the lands, upon the money and personal estates of the
  subject, and frequently including a poll-tax, where qualities, that is
  rank, were differently charged.

  The whole operation of distributing and raising this duty, has been by
  commissioners named by the King, or by parliament, who sometimes upon
  oath, and sometimes not, inquired into the extent of every one’s
  private fortune, and assessed them accordingly. Whoever wishes to have
  a more full account of this confused method of raising a land-tax in
  England, may consult Davenant’s Ways and Means, Article of Monthly
  Assessments, and Aids upon a Pound-rate.

In England, the case is totally different. The proportion every district
is to pay, is indeed recorded by an original distribution made many
years ago in King William’s time. By this it appears what every city,
county, university, &c. is to pay according as the tax is imposed at
one, two, three, or four shillings in the pound. This is precisely the
regulation in France, as shall be more fully observed; but still such
regulations nowise prevent the most grievous inconveniences which attend
this tax; because the burden of it does not consist in the total amount,
so much as in the partial distribution upon the inhabitants in every
subdivision.

In England, let me suppose the proportion of the general sum for a
particular district to be ten thousand pounds, at four shillings in the
pound. How is this to be levied as the law stands? Instead of books of
valuation, which shew at least the proportion of every man’s property,
if not the real value of it, assessors are constantly called in, who
examine the rents of all the lands according to the last leases of them.
If they have been improved and let at a higher rent than formerly, the
proportion of the tax is augmented. If they have not been let, but still
remain in the possession of him who improved them, the tax is not
augmented. If the tax be found to fall too heavy upon the lands and
houses, then personal estates are made to contribute, as is the case in
London. All questions or disputes about the repartition of the tax are
determined, without appeal to the courts of law, by the commissioners
appointed for laying on the tax; as in France they are determined by the
Intendant. Without this regulation all would run into confusion, for the
reason I am now going to mention, and which regards the second defect in
this tax.

Any proprietor of lands is entitled, from the words of the statute, to
insist that the whole personal estates of those of the district shall
enter into computation of the total value upon which the sum imposed is
to be assessed. Were such questions to come before a court of law, where
the judges are obliged to determine almost according to the letter of
it, I believe no land-tax could be levied in that kingdom. But manners,
not laws, govern mankind. The spirit of the English nation is such, as
to be incompatible with every thing which savours of oppression. Hence
the few complaints against the assessors, or those who judge between
parties. And as the land-tax is levied without any complaints, except as
to the total amount; while that remains the case, the fewer the
innovations made upon it are, the better.

In France, the sum of the _taille_ to be raised upon the kingdom for the
year is determined in the King’s council; and the proportion of every
district (called an _Election_) is there particularly specified. The
district of an Intendant is called a generality, and comprehends in it
several elections. The Intendant, therefore, makes the distribution of
the general sum imposed upon every election, and upon every town,
village, and parish in it, according to a certain proportion; and rules
are prescribed to the collectors of every parish, concerning the method
of taxing every species of income, every emolument of industry, even
every animal in the possession of those who are subject to this tax.
This proportion is calculated to carry the most scrupulous attention to
every man’s gain, upon all effects belonging to him, and upon every
possibility of making profit by industry. All this is carried into
execution with the greatest seeming equality in the minute subdivisions.

But as the first imposition of the tax is not proportioned to the actual
value of the income it is intended to affect, and as the Intendant does
not set out by a particular valuation of every man’s possession, before
he distributes the tax upon the several parishes, he is obliged to make
up the deficiencies by second and third distributions.

Although this _taille_ affects every species of property producing an
income, as well as every kind of industry and employment, it does not
affect every landlord for his rent, so much as every cultivator under
lease, for his supposed profits.

Land-rents in France belong, for the most part, to the higher classes;
and these, whether they be well born or not, are exempted from this tax,
providing they be _noble_; a word which has no reference to birth, but
to certain privileges which any man, who has money, may acquire.

It was in order to avoid this exemption, that the Marechal de Vauban
wanted to substitute a tenth instead of the present _taille_; for a
reason we shall presently see.

All the land-rents, therefore, of the nobles are exempted from the
taille, and are only affected by vingtiemes and dixiemes but when they
cultivate their own lands, their privilege of exemption from the taille
is confined to as much as four ploughs can labour; and this farming must
be carried on by menial servants, unmarried, in order to prevent such
proprietors from defrauding the tax, by really letting their lands under
pretext of holding them in farm.

This exemption, as to their land-rents, is more apparent, however, than
real. It is not the _lands_ of the nobles, but the _rent_ paid out of
them which is exempted from the taille; consequently, by imposing an
exorbitant taille upon the lessee, very little remains for the
land-rent; and this tax being laid upon a set of people who are loaded
with many others, is in the end more burdensome to the proprietor, than
if he paid it himself. But a change in this policy is impracticable. The
gentlemen of France will probably never submit to a _taille_; and
although, by yielding up that point of delicacy, their rents might be
raised in the end; yet as matters stand, they know they enjoy the rents
they have, free of tax, and if once they were made to pay any part of
them, they do not know where such payments might terminate.

To avoid the infinite oppression which results from the French principle
of sharing every man’s profit as soon as he makes it, the Marechal de
Vauban proposed to abolish the taille, as it is paid at present,
together with the _capitation_, _industrie_, and all the train of
cumulative taxes committed to the management of the Intendants; and to
establish in their room what he called a royal Tenth, meaning by this
term, a proportion of all the fruits of the earth, similar to what is
established in favour of the clergy. This he proposed to lay on,
according to the exigencies of the state, from one twentieth part to one
tenth upon every article of the gross produce of land, over all France.
This he imagined to be equal to one tenth of the land-rent. And the
author of a book published under the title of the _Reformateur_,
containing a new plan of taxation, in which there are some things worthy
of observation, follows in this particular the Marechal de Vauban,
without ever considering the true nature of a tax of this kind.

Of all the taxes upon the income of land-property, the tithe is the
worst; and it has undoubtedly been established among men, before
agriculture or taxes were understood. Lands in all countries are of
different qualities: some are proper for bearing rich crops of grain,
others are indifferent; some produce pasture, others forrest; the
revenue of some consists in wine, in mines, and in a thousand different
productions, which cost, some more, some less expence to cultivate. The
tithe takes without distinction a determinate proportion of the fruits,
in which is comprehended the tithe of all the industry and expence
bestowed to bring them forward. As an example of this, let me suppose a
field of corn, which cannot pay the proprietor above ¼ of the grain it
produces, many I know cannot pay above ⅕, but let me suppose it ¼:
another may pay with ease ⅓; another even ⅖; the fields about Padoua pay
½; grass fields pay still more; and rich hay fields will pay in some
places ⅔, and even ¾.

How then is it possible there should be any equality in a tax which
carries off, without distinction, a certain proportion of the fruits,
when those fruits bear no determinate proportion at all to the expence
of raising them? But besides the inequality of this tax among
proprietors, I ask how it is possible that any rent should be determined
for lands, which are subject to a _variable_ tithe, sometimes at 1⁄10,
sometimes at 1⁄20 of the produce? Let me demonstrate the impossibility
of such a plan, by an example.

I suppose the Marechal’s plan established, and that the tithe to be
imposed is to be deducted from the rent stipulated between master and
tenant. This was his intention: he has in many places declared, that all
tithes were to come out of the land-rent, which indeed is the only fund
upon which a land-tax ought to be established. And he has as often
declared that he never intended this land-tax should exceed one tenth of
the rent, or two shillings in the pound.

I suppose a field, producing every year 1000 bushels of grain, to be
let: it is to pay a variable tithe, sometimes of 100 bushels, sometimes
of 50, according to the exigencies of the state. I farther suppose one
third of the produce to be equal to what the farmer can pay the landlord
for rent. And I suppose the rent to be paid in bushels of grain.

According to these suppositions, the rent must be 333⅓ bushels subject
to the tithe. Suppose it to be laid on at ⅒, or 100 bushels. Deduct this
from 333⅓, remains to the proprietor 233⅓. The tithe comes next year to
1⁄20; this makes 50 of deduction, remains to him 283⅓. So instead of 10
_per cent._ of his rent, he pays in the first case 30 _per cent._ and
when at the lowest, he pays _15 per cent._ which is thrice as much as
the Marechal proposed to take.

But how are masters and tenants to reckon with one another? Lands are
not let according to a determinate proportion of increase. Suppose an
estate in lands of different kinds, how is the tithe to be deducted
then? Is the master to take the tenant’s word both for the quantity and
the value of every article he has paid as tithe, of every field, of
every article in his possession, even of the chickens in his yard? If on
the other hand, this variable tithe is to be thrown upon the possessor,
which, indeed, is the only possible supposition, which way are lands to
be let, when we see that the difference of the imposition, at different
times, is no less than 15 _per cent._ or three shillings in the pound?
This, however, would be the only method for masters and tenants to
reckon.

But let me suppose another proprietor to let a grass field adjacent to
that which bears grain, and that both were to be of an equal rent,
supposing all tithes out of the way. The gross produce of the grass
would be to the rent, little above the proportion of 4 to 3. Let us then
call the gross produce 1000, as in the other case, ¾ of which would be
750, for the rent. One tenth of the whole taken from that would leave
the rent at 650, or little above 13½ _per cent._ deduction at the
highest tithe, and 6¾ _per cent._ at the lowest.

What inequality, therefore, would not such an imposition occasion upon
land-rents, and what inextricable difficulties in letting of grounds?
From what has been said, without farther inquiry, we may declare that no
land-tax can possibly be raised, with any equality, by a royal tithe;
and the Marechal has never considered farther, than how the King could
with certainty and ease to himself, appropriate a portion of the lands
in his kingdom, leaving the proprietors and their tenants to settle
accounts the best way they could.

On the whole, nothing can make us approve of the Marechal’s, royal
tithe, unless it be the present oppression which proceeds from the
method of levying the taille; by which it happens that in France few
incline to acquire the full property of lands.

Most of the great estates consist of fee-farm rents. A man of three
thousand a year land estate, covers sometimes with his nominal property
(_dominium directum_) a whole country of fifty parishes; but the real
property (_dominium utile_) of this vast extent is subdivided into a
number of small fees, of which he is only lord paramount; and what
remains is the property of the lower classes, who pay what is called
_Rentes Seignoriales_, or noble rents, consisting in money and grain.
These rents can nowise be affected by any tithe imposed, because they
bear no proportion to the produce: and supposing they did, as in some
provinces, where they are called _agriers_, (which is the ⅙ or ⅛ sheaf
paid to the lord) the tithe, instead of taking a tenth of the _agrier_,
takes a tenth of the whole crop; consequently, only one tenth of this
sixth or eighth sheaf falls upon the lord; the tithe of all the rest
falls upon the poor proprietor or lessee, who the more he is industrious
is oppressed the more by this imposition; because it carries off the
tenth of his expence and labour, as well as of the farm which he rents.

This is the tax which the Marechal de Vauban recommended to be raised
universally over all the land-property of France, when the tithe was at
the highest. To this the late reformer adheres; but proposes the
twentieth instead of the tenth; and after a nice calculation of the
gross produce of France, he estimates one twentieth part of it to be
worth about 95 millions of livres _per annum_. Hence I conclude, that
the twentieth part of the income, or one shilling in the pound of all
the revenue of solid property in France, fairly collected, would not
much exceed one third of that sum, or about 30 millions, or 1 333
333_l._ sterling. This first part, therefore, of the Marechal’s tithe,
imposed at 1⁄20, would lay a tax equal to three shillings in the pound
on the poor lessees and vassals of the nobles, while, contrary to his
express intention, the whole fee-farm and noble rents of France, would
escape taxation. From this we may conclude, that no tax upon land-rents
can possibly be raised by way of tithe: as also that when it is taken in
kind it is the most oppressive, the most unequal, and the most
discouraging to industry, that ever was contrived.

The Marechal’s principal motive for proposing this mode of taxation, was
to avoid the difficulty of obliging the nobles to pay the taille. He
found also, that there would be great ease in collecting this revenue
for the King, without demanding money of the lower classes. The
consequence, however, would have been, either to ruin all lessees, if
they continued to pay the same rent for the lands as formerly; or to
introduce the greatest inequality imaginable among proprietors, if the
tithe had been totally cast upon their rents: but as to the method of
settling accounts between master and tenant, in consequence of this
tithe, both the Marechal and the reformer are totally silent.

The Marechal’s _Dixme royale_, with all its defects, is a book of great
value, from two considerations.

The first, that he had all possible access to come at the true state of
the nation. The second, that he wrote with great impartiality, and with
a sincere desire to serve the landed interest, without intending to hurt
that of the King his master. From this book, we have an opportunity of
judging of his notions of taxation; and from the consequences he himself
points out, we discover the miserable state of the common people in
France, whose situation at this day is not much changed for the better.

The Marechal’s scheme was to reduce the whole revenue of France under
four heads.

The first, a general tithe of all the fruits of the earth, without
distinction, which we have already explained.

The second, a tithe upon every income whatsoever, even upon the profits
of labour, servants wages, employments, possessions, and trades of all
denominations.

The third, was a modification of the _gabelle_, or the duty upon salt.

The fourth, which he calls the fixed revenue, was to be composed of the
domain, and several other branches of taxes which he allowed to subsist,
judging them, I suppose, not hurtful to the state.

I shall now shew wherein the Marechal’s plan of taxation is contrary to
principles, and leave the reader to make his conclusions.

First, he has declared in many places, that his intention was only to
impose a tax upon the income of land, which he understands to be that
part which remains after the deduction of all expences of cultivation
&c. in other words, what every one understands by land-rent, and which,
no doubt, is the only proper object of taxation: but in order to impose
upon this part his royal dixme when at the real tenth, he takes the
tenth part of the whole produce, instead of the tenth part of what goes
for the rent; and, as far as I have been able to discover, he never
perceives that there is the greatest difference between these two
quantities.

The second article was the tithe of every income, not consisting of the
fruits of the earth.

Where an income arises from a branch of property which can render it
determinate, I shall form no objection to a tithe or two shillings in
the pound upon it. But when he comes to tax lawyers, attorneys,
physicians, &c. according to the value of their emoluments, I own I
cannot find a possibility of preventing abuse in the collection, or
inequality in the imposition of the tax.

The Marechal’s principal point in view was agreeable to the standing
maxim in France, to make every one contribute according to his income.
Very right, so far as it is possible, without implying much greater
inconveniences than what can be compensated by this imaginary equality.
I call it imaginary, because in the execution it will be found, that no
body will really pay what they ought, except those whose income cannot
be concealed. Whenever any part can be hid, there must, in my opinion,
result a great inequality, and great oppression, in endeavouring to
ascertain it.

A short observation will suffice to give a view of his notions with
regard to merchants and trade in general. His intention was to be very
indulgent to this class of inhabitants; and he feels all the advantages
of trade. He proposes, however, to proscribe all notes of hand payable
to bearer, as it is a method of concealing wealth and exacting interest
for money; which he supposes to be contrary to scripture. Trade would be
ill carried on with the Marechal’s restrictions.

When he comes to the lower classes, which he supposes to comprehend one
half of the people, to wit, all tradesmen, manufacturers, and
day-labourers, their wives and children; he takes the example of a
weaver, as a middle term, to judge of the gains of the tradesmen and
manufacturers. He supposes this weaver to have a wife and family, to
work 180 days only (because of the many holidays, as well as accidental
avocations) at 10½_d._ sterling a day. This makes his year’s labour
worth 7_l._ 17_s._ 5_d._ sterling. Of this he takes 10_s._ 10½_d._ for
the greatest tithe. Besides this, he exacts of him for his salt-tax, for
four persons in his family, 12_s._ 9_d._ So that this man, whose whole
labour is only worth 7_l._ 17_s._ 5_d._ sterling, is to pay 1_l._ 3_s._
7½_d._ of cumulative taxes out of it, which is above ⅐ of the whole fund
of his poor subsistence: after which he adds, “This, in my opinion, is a
tax high enough for a weaver, who has only his two hands to gain his
bread with, and who has house rent, meat and clothes to provide for a
family, who frequently can gain very little for themselves.” To this I
must agree.

I shall give one specimen more of what the Marechal considered as an
ease procured to day-labourers, in their then situation; which relief,
however, they have not hitherto obtained.

These he also supposes to work 180 days in the year, at not quite 8¾_d._
sterling. He values his year’s labour at 6_l._ 10_s._ 6_d._ sterling,
and here is the employment of this sum according to the plan.

    He is to pay for tithe of his _industrie_               £ 0   8  8½
    For his salt-tax                                          0  12  9
    For five English quarters of rye                          4   7  1
    For clothes to the family, utensils, and repairs          1   1 11½
                                                                 ———————
                                                              6  10  6

I have been the more particular upon this part of the plan, because it
gives us a notion of what the Marechal thought a moderate easy tax laid
upon 8 000 000 of inhabitants, to wit, 2 000 000 men and 6 000 000 women
and children, according to his calculation.

I come next to the tax he proposed to lay upon salt, of which mention
has been made.

This tax is of the nature of an excise, and is called the _gabelle_,
which we have explained already in a note; and the objections to it, as
the Marechal has proposed them, are no less than three very material
ones.

First, the proportion of the duty is far too great, considering the
value of the commodity. The second is, that being imposed upon an
article of subsistence, it operates immediately on the price of the
salt, and only consequentially on the price of labour. This is no great
objection, were the proportion moderate; because insensibly the price of
labour would rise, were the tax generally and exactly levied in
proportion to the consumption: but this was not the case; and this
circumstance opens the last objection, and the greatest of all, to wit,
that the tax, proportional in its nature, is rendred cumulative, by
being raised at the end of the year, in order to oblige every one to
consume the salt required.

Now by this mode of levying the tax it loses every advantage, and
becomes an addition to the tithe laid upon the industry of the consumer.
If every man in England were to be rated at the end of the year, in
proportion to the excise of as much beer as he may reasonably be
supposed to consume, would that be an excise? certainly not. It would be
a poll-tax to all intents and purposes, which no man could draw back.

I have little or nothing to object to the fourth article of the
Marechal’s plan. He proposed no essential change, either as to the
imposition, or method of levying the taxes which composed it. The
principal heads of them are,

1_mo_, The royal domain, or the king’s landed estate, together with all
casualties attached to royalty, or feudal superiority; stamp-duties, and
the _controle_ of public acts by notaries.

2_do_, The customs upon importation and exportation.

3_tio_, Certain taxes of the purely proportional kind; among which was
one upon tobacco, and one upon liquors drank in public houses in the
country. Here entire liberty is left to the consumers; and the taxes are
principally calculated to affect, or, as he calls it, to punish luxury,
intemperance, and vanity. With this view, he wittily proposes an
imposition upon large and ridiculous wigs, at that time much in fashion,
and upon several other articles of extravagance.

This is a short sketch of the Marechal’s system of _royal tithe_,
considered as to the principles only, upon which the several taxes were
intended to be imposed. The treatise contains several admirable things;
especially with regard to recapitulations of inhabitants, lands, houses,
animals, &c. highly deserving the attention of the statesman, who
intends to execute any plan for national improvement.

I shall now set before the reader the Marechal’s calculation, as to the
amount of the four articles, when at the lowest, and at the highest
taxation. When the tithe is understood to mean the 20th part of the
fruits, &c.

  I. The tithe of the lands                                 60 000 000
  II. The tithe of all revenue and industry                 15 422 500
  III. The salt-tax at eighteen livres the minot[51]        23 400 000
  IV. The fixed revenue                                     18 000 000
                                                            ——————————
  Total of the four articles, when at the lowest taxation  116 822 500
                                                            ——————————
  When the tithe is understood to mean the tenth part of
  the fruits, the two first articles are just double of
  what they are stated at above, viz.                      150 845 000

  The salt-tax at thirty livres the minot                   39 000 000
  The fixt revenue never changes, and stands always at      18 000 000
                                                            ——————————
  Total of the four articles, when at the highest
  taxation                                                 207 845 000
                                                            ——————————

Footnote 51:

  The _minot_ is a measure of capacity equal to three Paris bushels, or
  the fourth part of a septier; which is about one half of an English
  quarter. This makes the _minot_ to be about an English bushel. The
  Marechal proposed that this quantity, when at the lowest price, should
  be sold for 18 livres, or 1_l._ 6_s._ 1½_d._ sterling; and when at the
  highest, at 30 livres, 2_l._ 3_s._ 6½_d._ from which we may judge of
  the exorbitancy of the gabelle, even after all the diminution he
  thought proper to make upon it. The French money mentioned in the
  Marechal’s Dixieme royale, is here converted into 52¼_d._ sterling,
  for the French crown of three livres: because the silver coin in
  France, at the time he wrote, was 30 livres 10 sols the marc (Dutot,
  chap. 1. art. 6.); and at present it is at 49 livres 16 sols.

In imposing this tax upon the fruits, he allowed no exemptions, not even
in favours of the princes of the blood: for this he gave an excellent
reason. Tithes, said he, were the ancient patrimony of kings. The Roman
emperors and kings of France enjoyed them. From those duties no noble
was exempted. This appears from the ecclesiastical tithe, which, he
alledged, to be nothing but the royal patrimony, alienated in favour of
the church; consequently, there is nothing derogatory in paying the
tithe, although nothing be more so than paying the taille. So great is
the difference between terms, when the ideas of a nation are connected
with them!


------------------------------------------------------------------------


                               CHAP. XII.
              _Miscellaneous Questions relating to Taxes._


The subjects of credit, debts, and taxes, have been so extensively
treated of in the two last books, that I hope no question I now can
propose will serve for any purpose, but to suggest the solution of it,
so far as it comes under the principles we have been deducing.

QUEST. 1. What is the most proper method for imposing a land tax?

I answer, that according to equity and justice, all impositions
whatsoever ought to fall equally and proportionally on every one,
according to his superfluity; but in land-taxes this equality is not so
essential as in most others. The great hurt arising from inequality in
taxation proceeds from the inequality occasioned thereby in the
competition between the classes of the industrious. When the same tax
affects people of the same class differently, those who bear the
heaviest load gain less, though their industry be equal. But in
land-taxes the case is different: the tax there only diminishes an
income already made, and in fact diminishes the value of the property;
so that were land-taxes made perpetual deductions, the whole loss of the
tax would fall at once upon the actual possessors at the time it is
imposed. Every subsequent purchaser, by deducting the land-tax out of
the rent, would calculate the value of the remainder only; and the
consequence of the tax would be, virtually, to transfer a part of the
land-property to the state.

The consequences of such a change upon property may produce a variety of
new combinations. The state may then sell this portion of their
property; they may with the price received pay off part of their debts;
they may acquire certain districts of the country, where, being both
sovereign and proprietor, they may abolish taxes, which would then in a
great measure affect themselves only, and establish manufactures for
foreign exportation.

Although an absolute equality in this tax is not so very requisite,
still the inequality ought to be ascertained, and every income intended
to be affected by the tax should be specified in one way or other. For
this purpose, the best method seems to be, to make the regulation of any
one year a rule for the subsequent years, until it be judged proper to
make a new general valuation of every part. This is a consequence of
what has been said: a fluctuating annual valuation, which is the case in
France, produces numberless inconveniences; and upon the whole, they are
far greater than those which it is intended to avoid.

I agree that the same land may be worth more one year than another; but
it is impossible by a fluctuating valuation to ascertain that difference
over a whole country, to the satisfaction of every one; and although, by
fixing it at one rate upon every possession, inequalities must take
place, yet fixing it from rising in proportion to improvement, will
prove an encouragement to industry, which will greatly overbalance such
an inequality. Every one then will be in the way of acquiring an
addition to his income, free of land-tax; and if this be thought too
great an encouragement to improvement, let the regulation be only fixed
for a determinate time; suppose a century. This is no more than giving
every one a lease as it were of their land-tax for a hundred years; and
experience shews, that without granting long leases it is impossible
that lands should ever be improved.

Were innovations practicable, according as right reason and plain
principles direct, it is very certain that a land-tax might be imposed
in a better way than I have here suggested. But to what purpose would it
be to lay down schemes beyond the power of execution, when the
principles already deduced so plainly point them out?

QUEST. 2. Which is the best method of levying taxes; by farm, or by the
management of commissioners appointed by the state?

The best way to answer this question, is to shew the inconveniences and
advantages of both. The arguments against farming are,

1_mo_, The great fortunes made by the farmers occasion jealousy, and
expose to the eyes of the people a set of men who are become rich at
their expence; hence envy arises, and hatred against government.

2_do_, In years of scarcity, war, or public calamity, deductions of the
rent, or annual sums paid by the farmers, are demanded, and can hardly
be refused, and the farmers always overvalue their loss; here therefore
is an unequal bargain: the farmer _must_ gain, the state _may_ lose.

3_tio_, The people pay less willingly to the farmers than to the King;
magistrates in general support the raising of duties with more
unwillingness, and severities upon delinquents are less easily born.

These inconveniences are avoided in the management. There men of the
best abilities may be entrusted with that employment; experience shews
that many branches of taxation have been carried to great perfection
under management, and men of probity and capacity will act with as great
zeal for the public as for themselves.

The principal arguments for farming are; the advantage of having a fixed
and certain revenue to depend on at regular terms; that the farmers act
with more zeal for themselves, and with greater impartiality in
employing under-officers, as well as more frugality, and therefore can
afford to give a higher rent, with considerable profit to themselves,
than can be made effectual under the best management: besides, every one
judges himself capable to administer the King’s affairs, because he
finds profit in it; but people think twice before they undertake to be
farmers of a revenue they do not well understand.

In the administration of taxes, it ought to be the object of a
statesman’s attention and care to profit of every advantage attending
the different modes of levying them. It is not sufficient to inquire
into the general consequences of the two modes of administration, the
management and the farming of taxes: those of the cumulative kind
especially, affecting the lower classes, would be very improper objects
of a farm; because it would be in a manner delivering over the greater
part of a people to the rapacity of tax-gatherers.

On the other hand, the farming of proportional taxes is not liable to so
many inconveniences. The farmers there are principally employed in
watching over those who _advance_ the taxes, and who are themselves, as
has been said, in reality the tax-gatherers over the people.

When therefore circumstances permit, without inconvenience, the
fabrication of exciseable goods to be incorporated with the farm, this
of all others is the best method of levying taxes. Examples of this are
familiar almost every where. The farmers of the salt and of the tobacco
in France are in this situation. In retailing those commodities, they
collect the price they pay for the composition; that is, for the farm of
them. It is not the same of the aids in France. There the farmer
superintends the immediate tax-gatherer, to wit, the retailer of
spirituous liquors, or of other things subject to the tax. The
circumscribing the number of places where exciseable commodities are
fabricated, and the shutting them up within inclosures, would greatly
facilitate the levying of all excises, whether by farm or by management.

In order therefore to decide whether the preference ought to be given to
the management or to the farm, circumstances are to be weighed. When a
tax is new, or has been ill managed, or has fallen, without any visible
cause, below what it formerly produced, or ought to have done; when the
amount is unknown, by being of an extensive collection: in such cases,
short farms, and even several subdivisions of them in a country, may be
of use. But when a tax is well understood, and a good plan of levying it
laid down, it may be well raised, and perhaps better improved, under a
management; as also, when it is of a nature to be easily understood, and
when the very exercise of levying it points out all the frauds possible
to be committed.

Davenant, who well understood this question, in his 4th Discourse upon
revenues, recommends farms which are not _absolute_, but _limited_, as
the best. By limited, he understands, that the farm should first be
given for a fixed sum; that the farmers should carry on an open
administration, liable to the government’s inspection in every
particular; that in case the profits of the farm should exceed the rent
stipulated, a certain sum should be ascertained for the charge of
management, and the surplus should belong to the King, allowing a
certain poundage to the farmers to animate their diligence[52].

Footnote 52:

  This plan of Davenant’s was carried into execution in France by
  Monsieur Silhouëtte, in 1759.

He very justly observes, that a tax, when farmed, in order to be
improved, will naturally draw, at first, a less rent than the sum
liquidated as a free profit by the former management; because the
farmers will be willing to secure to themselves a good profit; and next,
because they will be obliged to make a considerable advance, as a
security for fulfilling their engagement, which must also be considered
as a deduction out of the produce of the tax.

All the advantage therefore in farming must be looked for after the
expiration of the lease; for which reason, the shorter the term is, the
better: three years, it seems, was the common term in England, in
Davenant’s time.

All new imposed taxes ought to be raised with the greatest lenity, not
to revolt the minds of the people: the first year’s deficiency is well
bestowed, if government can but discover the different ways which may be
fallen upon to defraud the tax, and form a good judgment how far the
amount of it may go in time, when the management is brought to
perfection. As long therefore as a management continues to improve a tax
newly laid on, I should not think of farming it: but when, either from
the extent of the imposition, or the nature of it, frauds begin to
multiply, and management begins to become more and more difficult, then
is the time immediately to put it into farm, either for different
districts of a country, or in sub-farms. If this be delayed, frauds will
daily increase; and the difficulty of preventing them will carry
government to the expedient of imposing penalties, severe in proportion
to the frequency of the crime. Commissioners will constantly put these
in execution with reluctance; the management will become slack; or if
penalties are rigorously exacted, they will become a handle for
oppression; and even though justice be done, and none but delinquents be
punished, yet still the people will be ill affected with the punishment
of an action which in itself they are too apt not to consider as a
crime: whereas in farming, frauds will be prevented by vigilance more
than by fear of punishment; and this is by far the better expedient.
Thus instead of feuds daily increasing, they will daily diminish, and
the tax will improve yearly.

Here Davenant well observes, that _nothing but divine wisdom can at
first create perfect order; but in all human affairs it must be the work
of time, and the result of much labour and application_.

One good reason for managing a tax before it be farmed, is to learn the
nature of it, and of the frauds it is liable to. When these are not
rightly known, the farmer can more easily surprize the government, and
obtain from it new regulations, under the pretext of preventing frauds;
which regulations they may abuse, and turn to other purposes than those
intended.

Davenant has a very good remark, p. 154. That a new tax, imposed upon
consumption, and ill levied, equally raises the price upon the
consumers, and the whole profit centers in the hands of those who
retail. That when an old excise becomes ill levied, the profit is
divided between the inferior officers (who collect it) and the
retailers. The reason is, that a branch which is well understood, is not
so liable to _frauds_ as to _collusion_. This shews that in every case,
such a duty should never be imposed without exerting every endeavour to
have it rightly collected. The state should also keep a watchful eye
upon the augmentations made in the price of exciseable commodities, in
order to keep the augmentation justly proportioned to the duty. If this
be neglected, the overcharge hurts consumption, diminishes the produce
of the tax, and enriches the retailers only. Here competition is
necessary to be introduced: the public may even erect a manufacture
which may regulate prices, and so soon as they are properly ascertained,
the selling price may be fixed by an assize.

An ill levied imposition is attended with this additional inconvenience,
that it establishes inequality among the industrious of the same class;
consequently, an unequal competition. This happens when particular
officers are diligent and exact in doing their duty, while others are
remiss. The profits of retailers are _high_ in proportion to the
_negligence_ of the officers of the revenue; and their extraordinary
profits, enable them to undersell and to ruin those who are exactly
looked after: the consequence of this is, to diminish the number of
retailers; to introduce hurtful monopolies; and in general, to hurt the
whole branch of the manufacture. All remissness, therefore, in
collecting an excise, draws along with it a prejudice to the Prince and
his people: and the relative profit, which balances this loss, falls
into the pockets of the fraudulent manufacturer, and the corrupt and
negligent collector. This is not all: the deficiency must be made up in
another way; for taxes must produce the sums wanted. Thus the remissness
in collection occasions a new additional burden to be laid on the
people.

QUEST. 3. What is meant by _income_, when applied to individuals, and to
a state, and what is the nature of the _expence_ which must diminish it,
when it is considered as the object of taxation?

The great intricacy of this question proceeds from hence, that what is
really an expence to one is the income of the other: so that without
applying our reasoning to every particular fact, no general explanation
can be rendred intelligible. My reason for proposing it in this place,
is, that in commenting upon some passages of Davenant, in his discourses
upon the revenues of England, I may have an opportunity of illustrating
some things which have been already examined.

Davenant was an admirable writer; he had a remarkable genius for
political theory, and his sentiments upon many things are very generally
adopted. My intention here is not to refute opinions, but to avail
myself of his combinations, in order to explain my own ideas.

In his first discourse upon revenues, we find the following passage.

"The number of the people leads us to know what the yearly _income_ may
be from land, and what from mines, houses, and homesteads, rivers,
lakes, meers, ponds, and what from trade, labour, industry, arts and
sciences: for where a nation contains so many acres of arable land, so
many of pasture and meadow, such a quantity of wood and coppices,
forrests, parks and commons, heaths, moors, mountains, roads, ways, and
barren and waste land; and where the different value of this is
computed, by proper mediums, it is rational to conclude, that such a
part of the people’s expence is maintained from land, &c. and such a
part from mines, houses, &c. and that such a part is maintained from
trade, labour, &c. and the poor exceeding so much the rich in numbers,
the common people are the proper medium by which we may judge of this
expence.

“There is a certain sum requisite to every one for food, raiment, and
other necessaries; as for example, between 7 and 8_l._ _per annum_; but
some expending less, and some more, it may not be improper to compute,
that the mass of mankind, in England, expend, one with another, near
8_l._ _per annum_: from whence it may be concluded, that an _annual
income of so many millions_ is needful for the nourishment of such and
such a number of people.”

The reasoning here takes a wrong turn. It is of no consequence to
compute the value of things consumed without alienation. It is of no use
to know that the value of the physical-necessary of an Englishman is
8_l._ a year; because if this sum is supposed to be an exact quantity of
income, no one farthing of tax can be imposed upon it. So that imposing,
for example, 5 _per cent._ upon this article would only be raising the
physical-necessary to 8_l._ 8_s._ which 8s. must be paid, not by the
physical-necessarian, but by some body having superfluity who employs
him: and if there was not superfluity enough in England to answer to
8_s._ a head, such a tax could not be levied.

He afterwards supposes that the income of this class may amount to about
twenty millions a year, which at 8_l._ each, answers to two millions and
a half of people. He states the income of lands at fourteen millions,
and the income of trade at ten millions, in all at forty four millions a
year: and hence he concludes, that taxes ought to be imposed in some
proportion to this total.

Now if he supposes the first article of twenty millions, arising from
the income of those who are employed in arts and manufactures, according
to the former calculation of 8_l._ a head, to be as ready a fund for
taxation as the land-rents, we must examine, by the principles we have
deduced, whether there be any ground for such a supposition.

Let me suppose one of this great class to work a whole day for his
victuals only. Here is an alienation of work for food. It is impossible,
however, to raise a tax in money upon this alienation; because it may
easily be supposed that neither party has a farthing. The only method
therefore, in such a case, to impose a tax, would be, either to oblige
the workman to set apart a portion of his day’s work for one who would
pay the public for the value of it, or to oblige the person who gives
him his food, to pay the public for the privilege of employing him in
his service. The one and the other are examples of proportional taxes.
But this method of taxation is absolutely unknown. In this example there
is an alienation, which, I have said, constantly implies a superfluity
of one kind or other. The labour of the person working is, here,
superfluous to himself; therefore a part of it may be applied towards
the public. But the bread he receives is in no part superfluous, and
therefore cannot be laid under taxation _as to him_. But then the bread
given for the labour is superfluous to the person who gives it; and as
this implies that he has a superfluity of bread, the state may demand a
share of that superfluity.

By this exposition of the matter it appears, that in order to raise a
tax, in whatever way it be done, some kind of superfluity must be
supposed. It also points out how it should be laid on: for if by
mistaking the proper object, a part of the _bread_ should be taken from
the _workman_, instead of being taken from the _man who employs him_,
the tax would affect the physical-necessary of the labourer, instead of
affecting the superfluity of the employer.

Let us next suppose a workman able to do no more than what is requisite
to dig the ground for roots to eat, instead of digging it to procure
bread from a man who has bread to spare; still there will be no
alienation; consequently, no possibility of establishing a tax: for if
you either take a part of his labour, or of his food, you deprive him
equally of his physical-necessary. Yet the work of this man, and his
food, may be valued at so much money; and thus may enter, in one sense,
into Davenant’s general article of income or expence; but it does not
follow that any tax can be raised upon such an income.

To estimate, therefore, the total value, in any nation, of what is the
object of taxation, we must go another way to work. The first article
must be the _annual income_ of all _funds_. By funds, here, I understand
the capital wealth already made, in opposition to the produce of
industry, which may be considered as the materials of which such funds
are composed. The fund therefore is the accumulation of savings, which,
not having been spent by the industrious, form a capital of a nature to
produce an income, either from land, or from any other valuable thing.
Thus land-rents, annuities, interest of money, emoluments of offices,
salaries, even wages of servants, in short, every fixed income, I range
in this first article, which I call _annual income_, produced from a
capital already formed, either real or supposed.

This may be laid under taxation by a pound-rate, or otherwise, and forms
that kind of tax which I call cumulative and arbitrary; because a man
who has any sort of visible revenue, comes under this general rate, let
him have ever so many necessary deductions out of it, ever so many debts
and incumbrances. From such circumstances, cumulative taxes frequently
turn out extremely burdensome.

The second object of taxation is upon alienations made for money.
Whenever we come to dispose of money in the purchase of any thing, the
state has an opportunity of exacting a part of it as a tax; but while it
remains hid, it can neither be come at, or laid under contribution,
without extortion or violence.

All branches of expence may be laid under taxation by excises, which I
call _proportional taxes_; because a man is never subjected to them, but
in proportion to his expence; and his expence ought naturally to proceed
from his income.

As for trade, I do not clearly see how the profits of it can be
regularly taxed. In France, indeed, they are taxed under the first head,
and are considered as an income. Such an imposition is not well judged;
because _there_ the materials for making the fund are taxed as if they
were the income of a fund already made. It is only the savings out of
the profits upon trade, placed so as to produce a permanent revenue,
which properly can be considered as a fund: the _income_ therefore of
these savings, and not the savings themselves, should come under that
branch of taxation.

Customs are improperly called taxes upon trade. If ill imposed they stop
trade, or render it less profitable, by diminishing the demand for the
goods so taxed; but they take nothing from the profits already made.

In a trading nation, the great branches of commerce produce a certain
determinate profit, subject, I allow, to augmentations and diminutions,
from accidents and circumstances impossible to be foreseen: and the
customs imposed upon exportation and importation differ from excises
more in the method of levying them than in any thing else.

Davenant, in my opinion, would have given a better idea of the sum which
taxes might have been supposed capable of producing in England, had he
examined the amount of all the branches of revenue, and of all the
species of sale, than in the manner he has done. These two points known,
it would be expedient next to inquire, in what manner the several
articles could be made subject to either cumulative, or proportional
taxes.

I must now take notice of another passage of Davenant, where he explains
himself upon the question before us: it is in his fifth discourse upon
revenues, where he says,

  "By annual income, we mean the whole that arises in any country from
  land and its product, from foreign trade, and domestic business, as
  arts, manufactures, &c. and by annual expence we understand what is
  _of necessity_ consumed to cloath and feed the people, or what is
  _necessary_ for their defence in time of war, or for their ornament in
  time of peace: and where the annual income exceeds the expence there
  is superlucration arising, which may be called wealth or national
  stock.

  “The revenue of a government is part of this annual income, as
  likewise a part of its expence, and where it bears too large a
  proportion with the whole, as in France, the common people must be
  miserable and burdened with heavy taxes.”

I must comment a little upon this passage.

I have no objection to this exposition of the matter; the ideas are
intelligible and clear: but I object against the application of his
doctrine to taxes; because it would lead to error. Here are my reasons:

1_mo_, Income is called the whole of the earth’s productions: this I may
admit to be just, except when we consider income as an object of
taxation. But if we retain the same definition to express the income of
one, for example, who labours the soil for his own subsistence, as well
as of another who labours it as a trade, the difference in paying their
taxes out of it will be very great. He who draws nothing from the ground
but his physical-necessary, can be laid under no taxation; because he
has no superfluity. And if he be obliged either to give a part of his
crop in tax, or to sell any part of it for money to be paid to the
public, this diminishes his physical-necessary, and forces him to
starve: whereas the other who exercises labour as a trade, may be
obliged to pay a part of his surplus by way of tax or rent; and still
his physical-necessary may remain untouched.

It is for this reason, that in treating of these matters, I am always at
the greatest pains to point out, that nothing can be the object of
taxation, except what is over and above the physical-necessary of every
one.

In all countries where a _land-tax_, _steuer_, _taille_, or by whatever
name it goes, is established, care must be taken to prevent the
husbandmen from confining their labour to such a small spot of ground as
is barely sufficient to produce their own physical-necessary, unless
when they have a trade to assist them in paying what the public demands
of them.

From this circumstance, and this only, it happens, that the land-tax in
England is so little burdensome, comparatively to what it is in many
nations of Europe. Lands in England are let in large portions: no body
will let a farm so small as to be proportioned to the supplying of the
mere physical wants of the farmer. But in other countries, where the
oeconomy is different; where inheritances in land are constantly
divided, as moveables, among all the children; the lots become so small,
that the proprietor can draw no more from them than his own subsistence;
and then when a land-tax is imposed, this poor little portion being
valued in proportion to what it can produce, as well as the greatest
estate in land, the husbandman is starved, although the tax demanded of
him be laid on in the exact proportion to the produce of his land, while
he that has a surplus is quite easy.

I would therefore recommend, in countries where this minute subdivision
of lands has taken place, that for the future none under a certain
extent or value should be suffered to be divided among the children, but
ordered to be sold, and the price divided among them; and that the same
regulation should be observed upon the death of such proprietors whose
lands are not sufficient to produce three times the physical-necessary
of the labourers. This would engage a people to exercise agriculture as
a trade, and to give over that trifling husbandry which produces no
surplus, and which involves so many poor people in the oppression of
land-taxes. This plan can never be recommended as a plan to be executed
all at once: it must be done by degrees, and in proportion to the
progress of industry. The principle is so evident, that I never found
any one who did not immediately agree to the justness of my observation;
although in imposing land-taxes I have nowhere found it attended to[53].

Footnote 53:

  Some small attention is paid to the poorer sort of landholders in
  England: for, by the annual act for a land-tax, no poor person shall
  be liable to the pound-rate, whose lands, &c. are not worth 20_s._
  _per annum_ value.

Here then is the use of theory; it directs us in practice to avoid
difficulties, which might otherwise be judged unsurmountable.

2_do_, I farther observe, that it is a more hurtful error still to
mistake the produce of industry for the taxable income arising from it,
than to mistake the gross produce of land for the rent: because the
profits upon industry bear a smaller proportion to its produce, than the
rents of lands do to their full fruits.

The best method of raising money upon the lower classes of the
industrious, is rightly to lay their consumption under proportional
taxes, which they may easily draw back; because they will raise the
price of their work proportionally.

From this we may conclude, contrary to the common opinion, that the test
of well imposed taxes is to raise prices in proportion. When they are
rightly imposed, every one who sells a commodity which has paid a tax,
will draw it back, whether he be industrious or not. If he consumes it,
he cannot draw it back, but by raising the price of his work, which
again he cannot do, unless the tax be made so general as to affect all
his competitors; and unless the consumption he has made be unavoidable
to every one of them.

When we reflect upon the large quantities of exciseable goods which are
consumed as superfluities, we must conclude that the rise of prices,
daily complained of, proceeds more from our manners than from the taxes
we pay.

3_tio_, The expence of a people is not merely what is sufficient to
subsist them; but what they consume, either in fruits, of manufactures.
Had indeed Davenant computed the value of this necessary quantity, and
deducted it from the income, according to his acceptation of income; the
remainder would have been a tolerable good representation of what I mean
by income, or taxable fund; because whatever a people consume beyond the
necessary, I consider as a superfluity which may be laid under taxation.

4_to_, I must also differ from him in his idea concerning
superlucration, wealth, or national stock.

According to him, this is the quantity of income remaining after the
following deductions: 1_mo_, What is _necessary_ to clothe and feed the
people, 2_do_, What is _necessary_ for their defence in time of war, and
ornament in time of peace. But according to my notions, I must also
deduct all that is consumed in superfluities; for what is consumed,
whether _necessarily_ or _superfluously_, never can make an article of
superlucration, wealth, or national stock.

The superlucration then of a nation consists in the augmentations made
upon her stock of every kind, capable of producing a proportional
income: it is the converting into something durable the well employed
time of the inhabitants. In this sense the new pavement of London, the
roads, buildings, ships, &c. in England, are all articles of
superlucration, as well as the improvement of the lands, and
consolidation of the balance of her trade, which has created that part
of the public funds belonging to natives.

QUEST. 4. Is it possible to convert a land-tax into one of the
proportional kind?

This is a curious speculation; and as it is a short exercise upon
several principles of this science, it comes in properly at the
conclusion of our work.

To make a land-tax proportional, the proprietors of land should be
enabled to draw back the burden, in the sale of the earth’s productions.
This they cannot do, as matters stand. The farmers who pay no land-tax
undersell them; because they have no tax to draw back.

Since the tax, therefore, cannot be drawn back directly, let us apply
our principles to discover a method how this might be done indirectly.

Let nothing but lands be subject to this imposition.

Let every part of them be valued, and recorded in a general register.

Let bread, butchers-meat, and subsistence of all kinds, be laid under an
excise, _in all markets_, and nowhere else, at a rate sufficient to
raise the tax intended to be laid upon the lands; and let the amount of
this tax be drawn back by the landlords, in proportion to the valuation
by which they have paid the land-tax.

That this is a reasonable imposition, appears from the whole plan of
this work. We have seen, in the first book, how the great body of the
people is divided into labourers and free hands; that the free hands are
the inhabitants of towns, who go to market for subsistence, and consume
what corresponds to the land-rents; consequently the landlords, who at
present pay a cumulative tax, which they cannot draw back in any shape,
are justly intitled to the amount of this proportional tax, laid upon
the great articles which produce their land-rents, and which are
consumed by the inhabitants not employed in agriculture.

Every one who has writ concerning taxes has endeavoured to contract the
object of them as much as possible: more, I imagine, with a view to ease
the public than the people. I have followed another course. I have been
for multiplying the objects of taxation as much as possible, and for
making them more in proportion to expence than to property or income.
But that I may conform myself in some measure to the ideas of those who
have examined the same subject, I shall propose a tax, which would fill
up the place of every other; and could it be levied, would be the best
perhaps ever thought of.

It is a tax, at so much _per cent._ upon the sale of every commodity.

------------------------------------------------------------------------


                              CHAP. XIII.
                  _Recapitulation of the Fourth Book._

                  PART I. _Of the Interest of Money._

[Sidenote: INTROD.]

I introduce the subject of credit and debts, by giving a general idea of
its extent. It comprehends the method of establishing a solid security
for money borrowed; of extending the object of such security in
proportion to circumstances; of supporting the credit of the borrowers,
when over-stretched; and of preventing, as far as possible, the fatal
consequences of a bankruptcy, when it can be no longer supported.

I shew how all mysteries relating to credit proceed from our ignorance
only of its true nature; which is confidence established upon a visible
and palpable fund of payment. I observe how delicate a thing credit is,
and how gently it must be dealt with; how incompatible the forms of
common law are with the discussion of questions which arise between
merchants; how necessary it is to form a jurisprudence peculiar to
trade, and to support it by manners more than by authority; and when
credit is once set upon its true basis, how all aerial schemes, bubbles,
and public bankruptcies will be avoided.

CHAP. I. Here I shew how impossible it is to establish credit by
authority; how inseparably it is connected with liberty and
independence; and still how compatible it may be with that supreme power
which is vested in every government.

CHAP. II. The object of credit is money lent; the basis of loan is the
payment of interest. If money be wanting, credit will die; consequently,
there must be a method found for augmenting and diminishing the quantity
of money in proportion to the demand for it. It is augmented, by
converting land into paper-money; it is diminished, by relieving the
land of the engagement upon it, and extinguishing the paper-money. This
is no more than a contrivance for turning into a _circulating value_,
which is the principal characteristic of _money_, the obligations of
private men, which in all countries are considered to be of an equal
value with any coin.

I here explain what is meant by money _stagnated_, and by money
_realized_. Money, while it is employed in circulation, can carry no
interest; the moment it lies idle to one man, were it but for a day, it
may be worth interest to another, who willingly pays for the use of it,
when he has occasion either to buy what he wants, or to pay what he
owes. If no body be found who wants it, then it is said to _stagnate_ in
the hands of the proprietors. This denotes that circulation is full. He
therefore desires to _realize_ it; that is, to purchase with it some
kind of income. For this purpose, if it be coin, he sends it to some
place where coin is wanted. If it be paper, he demands of the debtor in
the paper either to give him an interest for it, or to convert it into
coin, which is the money of the world. Both are called realizing; and in
proportion as money is realized, circulation diminishes.

Hence I conclude, that as the use of circulating money is to carry on
alienation, so the use of stagnated money is to produce an interest;
consequently, a perpetual interest is better than money, when it is not
wanted for the use of circulation. If therefore, by the policy of a
country, the capital of every perpetual interest can be immediately
converted into money for the use of circulation, the inconvenience of
capitals not demandable is removed; because although you cannot make the
debtor pay, you can sell what he owes you to another, who will; and this
equally suits your convenience.

CHAP. III. The simplicity of manners among the primitive christians,
circumscribing very much the uses for money in circulation, a great
quantity of the coin was consequently locked up. Paper money _then_ was
superfluous; because even coin itself so far exceeded all the uses of
their circulation, that it was considered in the light of jewels and
plate with us.

Taking interest for it, when lent, appeared to them as unreasonable, as
if a lady, in these times, were to ask a price for lending her jewels to
a friend.

However, as money was necessary on many occasions to those who had none
locked up, the Jews, who have always despised land-property, made a
trade of lending; and this drew an odium upon the practice. I can
ascribe it to no other cause. Our manners are totally changed; and
Christians lend money at interest as well as Jews. Neither trade,
industry, or credit, can subsist without it; and as money cannot be
lent, without allowing interest to be taken, interest is become the
basis of the whole system of credit, and comes to be examined in the
following chapters.

CHAP. IV. Before industry was established, the calls for money to borrow
were few, and chiefly confined to Princes in time of war, and prodigal
proprietors of land in time of peace. Their demands were urgent, and the
interest they paid was in proportion. The lenders possessed but a small
part of the coin of the country; because the bulk of the people locked
up all they could. Those who hoarded, would not lend; and this greatly
diminished the fund of borrowing: besides, Princes and prodigals had no
sooner spent the money borrowed, than it fell again into the hands of
those who hoarded; and the lenders found, no doubt, great difficulties
in procuring fresh supplies.

When industry and trade brought money out of its repositories, when the
necessity of permitting interest appeared evident to the church, the
coin then began to make its appearance, and was ready to be lent. This
opened a market for money. The price of money is the rate of interest.
At this market, the borrowers and lenders appear in competition among
themselves, according to circumstances. If more money is demanded to be
borrowed than is offered to be lent, the competition takes place among
the borrowers, and interest rises. If more is offered to be lent than is
demanded to be borrowed, interest falls. Those who borrow money may be
divided into two classes, viz. those who intend to spend it, and those
who intend to trade with it.

When more money is to be lent than the first class demands, the rate of
interest will be regulated by what merchants _can_ give for it: when
there is less, it will rise to what the prodigals _will_ give for it.

But this first class must have good credit, or their borrowing will be
cut off. When therefore a statesman finds, that the borrowing of such
people hurts the commercial interest of his country, by keeping interest
high, he should weaken their credit, by tying up their lands by entails.
When their borrowing becomes necessary for the encouragement of
industry, and for bringing all the money there is into circulation, then
their credit should be enlarged, by promoting an expeditious sale of
every branch of their property.

CHAP. V. Thus, without the aid of law, the interest of money is
regulated by demand. But a state must not totally overlook the interest
of the class who spend more than their incomes. It would be inhuman to
throw them into the jaws of usurers. Statutes therefore prevent interest
from rising above a certain rate. This preserves them, and renders the
dissipation of their fortunes more gradual.

But although a statesman has it in his power to guard his people against
the oppression of usury, by preventing the rate of money from rising
above the ordinary standard of demand, he cannot equally force it down
below this standard, even although the interests of trade should require
it: because if the monied men can lend their capitals abroad, at a
higher interest than they can procure for them at home, they will
distress the landed interest, by demanding what they owe, and all the
money will be sent abroad, as was the case in Scotland in 1762.

This was not the case a hundred years ago. No money then could be lent
abroad by Englishmen; because those who would give high interest had no
credit. Thus government could bring it down at will; monied men were
forced to consent; and the price of land rose in proportion as interest
fell.

As it is the extravagance of men of property which raises the rate of
money above what is consistent with the interest of trade, the
expedients to bring it down, are, 1. To circumscribe borrowing by the
prodigal: 2. To suspend borrowing by the state: and 3. To throw as much
public money as possible into the market, by paying off debts. When a
statesman has by such measures brought the rate of money considerably
below the legal price, he may, by a new statute, prevent its rising
again so high as formerly; but still he must keep in his eye the rate of
money, and state of credit in rival nations, in order to avoid the
inconveniences already mentioned.

CHAP. VI. If Great Britain were to regulate the rate of money below what
the fluctuations of demand are commonly found to carry it, then in time
of war, as soon as demand, which can be subject to no statute, got up to
the high standard, the whole landed interest would be torn to pieces by
their creditors: for the debtors could not borrow from one to pay
another, because no man would give them credit. This would put an end to
all their expence; the funds which supply it at present (the land-rents)
would be carried off by creditors; and all the industrious who serve
such proprietors of land would suffer considerably for want of
employment. The conclusion which the generality of people would draw
from this phænomenon would be, that high interest, instead of being
hurtful, is advantageous to trade.

CHAP. VII. Hence we may conclude, that low interest is principally
advantageous for carrying on foreign commerce, and that the best method
to keep it low, is to keep circulation full, by facilitating the melting
down of property.

This expedient has been contrived by merchants in the establishment of
banks upon mortgage; and there is a possibility that landed men, some
centuries hence, may find out that they may imitate the example of
traders, and contrive the means of borrowing cheaper than they can do at
present.

Were a particular nation to carry such expedients into execution with
success, it would have the effect of bringing down the rate of money
every where. This would sink the general average of the whole, but never
would prevent the operation of those principles by which it had been
brought down; and the most intelligent nations would still have the same
advantages as before, of keeping their interest low relatively to their
neighbours, which is the great _desideratum_ for the support of public
credit, as well as of foreign trade.

CHAP. VIII. But although it is of very great advantage to trade to have
interest low, we cannot judge of the prosperity of trade from this
circumstance alone.

That nation gains the most upon her trade who draws the greatest balance
from the rest of the world. Now the balance cannot be judged of by the
rate of interest; because this depends more upon manners and policy than
upon the state of industry. Industry must be supported by superior
dexterity, natural advantages, and promptitude of payments, as well as
by low interest. Prompt payment alone, is of more consequence to the
industrious populace, than a small difference upon the rate of interest.
That encourages the whole class of manufacturers. Low interest is
principally an advantage to the merchants who are obliged to employ
credit for collecting their work; and merchants themselves who trade
upon credit, often gain more by quick returns than what will compensate
a considerable difference in the rate of interest. Low interest may more
properly be called the barometer of public credit than of foreign
commerce.

CHAP. IX. From what has been said, I conclude, that the rate of interest
does not sink as wealth increases; because it is influenced by many
circumstances, which do not depend upon opulence. It depends upon the
spirit and manners of a people, and will fluctuate with them.


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                          PART II. _Of Banks._

CHAP. I. Having deduced the principles which regulate the rate of
interest, I proceed to investigate those which influence domestic
circulation; and as banks are the great engine by which circulation is
carried on, in tracing the nature of banks we shall fully understand its
policy and principles.

Banks either circulate notes, or transfer credit written in their books:
the first are called banks of circulation; the latter banks of deposit.

All banks are founded on credit, and according to the nature of their
institution, I may divide the credit they are built on into three kinds,
viz. private, mercantile, and public.

Private credit is when the ground of confidence is real property,
pledged for the security of the loan.

Mercantile credit is when the cause of confidence is in the trading
stock, abilities, integrity, and good fortune of the person who obtains
it.

Public credit every one understands. It is when the ground of confidence
is a fund secured by public faith, in favour of the creditors, for the
interest and capital due, which last however is never exigible from the
state.

Private credit is the most solid of the three; mercantile credit is the
most precarious; and public credit depends entirely upon the maxims of
every government with regard to public faith.

It is the object of confidence, not the quality of the person obtaining
credit, which determines the nature of the credit. A merchant may grant
bond on the credit of his lands; a landed man’s bill, as member of a
mercantile company, may only affect his stock in trade, and a Prince may
pledge a province for a sum of money.

The debts of a state, and the bills of merchants, are more easily
transferred than private securities.

Public and mercantile credit stand upon a more precarious bottom than
private security. A suspicion of insolvency will shake the two former;
real insolvency only will destroy the latter.

These are some of the peculiarities which characterize the differences
between the three kinds of credit. The justness of the distinctions I
have made appear from them, and from other circumstances mentioned in
this chapter; and the utility of such distinctions will appear from
their application as we proceed.

CHAP. II. To establish private credit, on the most solid and extensive
bottom, the effects of debtors should be rendred of a ready conversion
into money; the sale of lands should be rendred easy and expeditious; no
entails or cloggs by mortgage and the like, should be allowed; debts
upon possessions ought to be registred, and those due to banks (the
great public debtors) should always be considered in a most favourable
light.

CHAP. III. Banks of circulation upon private credit, are of great use in
the infancy of industry. In countries where it is only taking root, the
greatest obstruction it meets with is a scarcity of money. When money is
scarce, payments are ill made; and when the uses for money increase, if
money be not made to augment in proportion, alienation will cease to go
on, and payments will daily be more precarious. This is so evident that
I shall not insist upon it.

Now as every individual in a state does, less or more, support industry
by consuming its produce, money must be provided for every one in
proportion to the value of his property. This opens at once the
principle of banks upon private credit.

He who has money will, every where, willingly lend to every one who can
give good security for it; and the obligation granted by the borrower is
considered by the lender as better to him than the money he lends.
Before the establishment of banks, such loans were made in coin; but as
people discovered that a good obligation was as good as coin, they
discovered also, that when obligations could be made to circulate, they
might supply its place.

For this purpose, banks found out an expedient of dividing obligations
secured upon property into small parts of the capital sum; and by
delivering them back to the borrower, with an obligation to pay them in
coin to the bearer on demand, they constituted themselves debtors to the
public for every note. The consequence of this was, that the coin of the
country became less useful in circulation; and as the banks demanded it,
and even gave premiums for obtaining it, it came into their hands, and
served the purpose of changing notes; that is, of subdividing the sums
mentioned in them, into the lowest denominations of the money of the
country.

There is not a nation in Europe so ignorant as not to feel the use of
this policy; but there are few who have discovered how to establish the
confidence of the public in this general debtor, the bank. The reason
is, that people imagine a bank should at all times be able to turn all
their paper into coin. Were this possible to be done, where would be the
use of banks? How could they multiply money?

From this short exposition, we may understand the difference between
banks upon private, mercantile, and public credit. The first lend upon
the security of possessions; the second, upon bills of exchange, which
is called discounting; the third, upon the security of the public funds.

CHAP. IV. A scarcity of money only being found to stop the progress of
industry, and thereby to circumscribe the gains of merchants who supply
consumption; and they perceiving that men of property become bad
customers, more from the impossibility of making payments than for want
of an inclination to consume, joined together, and formed a considerable
stock which they exposed to the eyes of the public. This gave them
credit, and every one who had money to lend was fond of placing it in
their hands. Other people who wanted to borrow, applied to them for
money. Their answer was, we have no coin; but if you want money for any
purpose, we can assist you in credit, if you will give us security upon
your estate. Here is, said they, a note of ours, which any body will
take from you as payment for what you want. This was the same thing to
the man who wanted money for a particular use, as if they had given him
coin; and as such demands became frequent, the notes were printed, and
insensibly banking was established.

States perceiving the abuse which might follow, were every one allowed
to issue paper in this manner, judged it proper to erect companies, who
lent them considerable sums as a security for their faith to the public;
and the superior credit of such companies drew the confidence of the
public, and circumscribed the dealings of individuals. Thus the trade of
Lombards, who had formerly supported circulation by their bills of
exchange payable to order, received a farther extension by the
establishment of banks, who, by issuing notes payable to bearer, rendred
them, in all commercial countries, every bit as useful as any coin.

Banks once established, regulations became necessary; and of these the
first and fundamental one, was, to issue no notes but upon good
security. If it be asked, what security should be taken? The answer is,
the best those who want credit can give. In a country where trade and
industry are little known, but where a taste for refinement is taking
place, demand must be encouraged, in order to augment the supply. And as
this demand for consumption should, naturally, come from men of landed
property; the bank, therefore, should first resolve to issue notes upon
the security of that kind of property.

When industry becomes more extended, and when trade becomes more secure,
from the solidity of mercantile funds, banks may then begin to discount
bills of exchange, and as this branch of credit enlarges, the bank will
by degrees participate of the nature of those secured upon mercantile
credit.

When public credit, again, is well established, they will lend upon
government securities, pledged in their hands, and thus become founded
upon public credit.

According therefore to the principal object of their trade, they are
said to stand upon private, mercantile, or public credit.

When a proprietor of lands gives his bond to a bank, it should be
understood, that as long as he regularly pays the interest of the money
borrowed, the bank is not to demand the capital.

For this bond they give notes, which are considered as ready money, and
therefore carry no interest. So the profit of the bank is to receive
interest for what they lend, and to pay none for what they owe.

What they owe is the paper they issue. They owe this to the public; and
the security which the public has, is the security which the bank
received from the person who borrowed from them.

Hence the solidity of banks upon mortgage. Their notes become money, and
this money is secured upon the whole stock of the bank, and the whole
property engaged to them.

But as the stock of the bank is of a determinate value, and as the notes
they issue may very far exceed it, the credit of a bank will be
precarious, unless the value of the securities upon which they lend, be
equal to all the notes in circulation. It will also be precarious in
proportion as the securities themselves are so. Hence the interest the
public has to take care that banks give credit upon nothing but the best
security.

CHAP. V. A bank, therefore, which lays down a rule to lend upon the
mortgage of solid property only, would destroy confidence, if it should
launch out in giving credit to those who have no solid property to
pledge.

CHAP. VI. The use of all banks is to support domestic circulation: this
is two-fold; that carried on by consumers, and that carried on by
traders and manufacturers, who supply consumption.

The circulation carried on among the first is in proportion to their
income, and their credit should be in proportion to the funds which
produce it. The circulation carried on by the last is in proportion to
the demand for their industry.

If a bank be established on the credit of solid funds, it is very plain
that they cannot support the circulation of manufacturers and dealers
upon the same terms, or in the same way they do that of proprietors.
They may indeed discount bills; but they cannot give a permanent credit
upon a security which is not founded upon property. This opens a new
combination.

Trade and industry are dispersed through many hands, and if the stock of
those who carry them on be compared with what is necessary for that
purpose, it will appear very small. What is deficient in stock must be
made up to them in credit; and this will be in proportion to their
integrity, capacity, and good fortune. A frail security for paper, which
is to become the money of a nation! Such securities must either be
rejected by every bank whatever, or the whole fabric will tumble into
ruin. But this subaltern class of dealers may have recourse to
merchants, whose wealth and funds are solid and extensive. To these a
bank may give credit, and they again, in their dealings with the other
class, may indemnify themselves of all the risk they run, by profits in
proportion to it.

This class of merchants I call _exchangers_; because they deal
principally by bills of exchange in the credits they give, which are of
the greatest advantage to an infant trade and a growing industry.

CHAP. VII. When banks were first established, there was no money known
but coin, and many there still are, who do not clearly see how money can
possibly be made of any thing but metal. The scarcity of coin raised the
rate of interest, and when banks began to lend their paper, they exacted
the same interest as if they had been lending coin. Hence they were
obliged to promise payment of their notes, in coin, upon demand. In
consequence of this, the policy of circulation proceeds upon the
supposition, that bank notes are equal to coin in every respect; and
when any interruption happens in the ready exchanging them at the bank,
all runs into confusion. I shall afterwards shew how this might be
prevented.

While a country has a balance of trade, either at par or in her favour,
no body has occasion for coin, except to reduce bank notes to their
lowest denomination of money. But when a balance is due to other nations
which must be paid in gold and silver, every one who wants coin for that
purpose, runs to the banks, which are obliged to pay in it, and then
they are thrown into distress. Hence we may conclude, that a bank taking
upon itself the obligation of paying in coin, without carrying its
policy farther than the banking trade, cannot stand its ground in a
country which owes, upon an average, a balance to other nations. This
opens a new and a most curious combination.

CHAP. VIII. In the mechanical operations of trade, when they are not
combined upon principles, and directed by a superior policy, every
balance due from one nation to another upon the whole of their
reciprocal payments, that is, in consequence of their debts and expences
abroad, as well as in the course of their mercantile operations, must be
paid in the metals.

For transacting this balance, there is a set of merchants who deal in
the business of exchange. Every debtor to another country is supposed to
have value in his hands for it, which he converts into bank-paper; with
this he buys a bill of exchange, drawn upon the place where he is
debtor, and the exchanger who sells it, demands coin of the bank, which
he sends off for payment of his bills. If during this operation the bank
should stand with its hands across, and only think of expedients to
provide coin, it is evident, that if specie should totally fail in the
country, trade must be at an end, and the credit of the bank would be
undone: for no body will enter into every combination necessary to
discover the impossibility of converting the whole paper currency of a
nation into gold and silver. Thus a bank which cannot pay in coin, will
be supposed to be ruined, though in reality it may be worth half the
property of the state.

Is it not then of great consequence to banks, and to a nation, that the
principles of their trade, and the security of their paper, should be
well understood? And is it not wonderful, that they themselves have not
made evident a thing which they must understand far better than any one
who has not had their experience?

CHAP. IX. When a country gentleman owes money in town, beyond what his
rents can pay, does he not borrow from some body who has money? Does not
this borrowing prevent his lands and his houses from being torn to
pieces by those who have a right to demand money of him? Would he not be
laughed at, if he were to delay pledging a part of his property, in
order to secure the whole?

The case is just the same with banks. They owe a sum of coin equal to
all the paper they have in circulation. In this they represent the
country gentleman. Foreign nations demand payment from them in coin;
because it is the same thing whether this demand be made directly on the
bank, or on those who can demand it of the bank. Such nations represent
the town. Must not then the bank borrow upon the credit of the
securities pledged at the time they issued their notes, and which to
them represent the gentleman’s lands? And can they borrow from any but
those who have money? Their own country can have none to lend, while
they owe a balance; they must therefore borrow from other nations, and
transfer what they borrow to their creditors abroad.

Hence I conclude, that as nations which have coin pay what they owe with
it, and thereby diminish its quantity; so nations whose money is their
land, must pay in land, to the diminution of that species of property:
and as a man who owes a thousand pounds upon his estate is only
proprietor of it for the remaining value; in like manner, a country
which pays an annual interest to other nations, is only proprietor of
what remains.

CHAP. X. If the country gentleman, who is pushed by his creditors for
money, which he cannot expect to draw from his rents as they become due,
should borrow, for a few weeks, from one who, after that time, will have
occasion for his money himself, he will be put to all the expence of
giving security for it, and at the end of that short time, he will be at
as great a loss as ever to find money to reimburse the man who had lent
it him. This represents the expedient used by banks to obtain temporary
credits, instead of a permanent loan upon a regular interest.

CHAP. XI. When trade goes on well, and produces a regular balance in
favour of a country, the trade of banking is easy, and few employments
require less capacity. But when the balance begins to be unfavourable,
and when, in self-defence, they are obliged to deal in exchange, the
case is different.

Whatever balance is due abroad must be paid by the banks, as has been
said, either in coin or in credit. As long as they pay in coin, the
business of paying the balance is left to exchangers, who conduct the
operation. But whenever banks borrow abroad, upon a permanent loan, and
thereby acquire a fund to draw upon, the business of exchange falls
naturally into their hands, and they may profit of it according to
circumstances. In this case, not one shilling of coin can go out of the
country, in the way of payment; because there will be a loss to any one
who sends it away, when he can pay cheaper by a bill.

CHAP. XII. But the most complicated combinations arise from the
consequences of a wrong balance on the state of domestic circulation. I
hope this matter will be more easily comprehended, from the short
recapitulation I am now to give of it, after all that has been said upon
the doctrine of taxes, and of the difficulty of paying them, when money
is sent abroad.

Money is the instrument of alienation; and when this instrument is taken
away, alienation must cease. Now, it is a matter of indifference as to
circulation, whether money be rendered scarce by being sent out of the
country by the state in time of war, or by the subjects who owe it to
strangers in time of peace. A determinate quantity of money is requisite
for domestic circulation. In whatever way this comes to be diminished,
it is the duty and interest of banks to fill up the void as fast as
possible, by readily furnishing credit at all times to those who can
give security for what they demand. If banks, by paying balances, shall
have exhausted their fund of coin, the fault is their own. Why did they
not in time provide the necessary funds abroad? But in whatever manner
they pay the balance, the consequence is, to take a sum of money equal
to it out of domestic circulation; and this cannot be replaced but by
more money lent by them upon new securities. If an ill grounded fear
should at such a time engage them to refuse credit, when demanded, the
country will be in a worse situation than if banks had never been
established, from the sudden diminution of money, which, without that
establishment, never could have happened.

But if banks would consider the whole foreign balance as immediately
their own debt (and it is so, when they are obliged to pay it) they
would provide the easiest method of acquitting it: since none of the
expence incurred can fall upon them, in any proportion to the gain they
make, in receiving interest for all they lend, and in paying none for
what they owe within the sphere of their own circulation.

CHAP. XIII. Whatever contracts circulation, hurts a bank, and offers no
relief to it with respect to the payment of balances. If they borrow
money at home, they cut off the branch they stand upon, unless they
continue at the same time to give credit to all who demand to borrow
upon good security. This last combination was omitted in the chapter I
am now recapitulating; because of the multiplicity of those I was
obliged to introduce, in order to demonstrate how hurtful it is for
banks voluntarily to diminish the circulation of the country where they
are established. I shall therefore bring it in here, and refer to the
chapter for the other combinations which cannot be abridged.

Did banks, upon mortgage, make it a rule to borrow all the money offered
to them, at a small deduction from the common interest, while at the
same time they continued to lend as formerly to every person of good
credit; the consequence in a little time would be, that they would
become the absolute center of all borrowing and lending, and the
greatest part of the expence of drawing securities would be saved.

Every person who had money to lend, would lend it to the bank; and every
one who had money to borrow, would borrow it of the bank. Upon these two
operations, the difference of interest paid, and received, would more
than balance the additional expence of so great a detail. But then
indeed some new law would be necessary to facilitate securities. The
clogs laid upon solid property oblige the bank to insist upon
conditions, which put it out of the power of many persons of good credit
to borrow from them. But I do not propose plans: my aim is confined to
principles; and from those I have mentioned a new clause in bank notes
would arise, viz. to pay in coin, or by a transfer of interest at a
determinate rate, at the option of the bearer, not of the bank.

CHAP. XIV. This would be an optional clause, very different from that
lately introduced into Scotland, where the option of paying interest was
left to the bank. This has since been wisely suppressed; because it
proved a heavy clog upon circulation, and enabled the bank to avoid
doing what their own interest, and that of the nation, required of them,
viz. the ready payment of all balances against the country. But in
suppressing optional clauses, government should facilitate the means of
paying balances, and of providing coin. This is done by establishing and
supporting the credit of the banks, in proportion to the solidity and
extent of their funds. An example of this nature occurred in Ireland, in
April 1760, when the parliament interested itself directly in the
support of the credit of some private bankers. A mint also is necessary;
or if this should be judged improper or superfluous, some assistance at
least should be given in conveying coin from the place of its
fabrication.

CHAP. XV. All branches of policy are brought to perfection by degrees,
when, instead of being established at once on sound principles, they
introduce themselves mechanically, by custom and practice only. When
therefore a national bank is not found to answer all the purposes
expected from it, private people imitate their plan, and fill up the
void. Thus in Scotland, when the banks of Edinburgh did not sufficiently
support circulation in the more distant parts of the country, private
banking companies were erected, and degenerated into a great abuse.
Every one issued notes payable to bearer. Thus the public was filled
with paper money, the credit of which was quite unknown to many, who
were however forced to receive it.

Whatever is payable to bearer, is payable to the public; and no doubt
the public has a good right to prevent the issuing of notes by any but
such as it has confidence in. When a note is payable to order, every one
who circulates it is responsible for the value; but when it is payable
to bearer, there is no recourse upon any but the first grantor of the
obligation. Such regulations therefore should be made in this respect as
may give a solidity to the paper, facilitate a general circulation, and
prevent the establishment of a currency confined to particular districts
within the same country, which tends to introduce a course of exchange
from one town to another. This would be the case, were the circulation
of every county carried on by the county bank. A communication,
therefore, of interest between the banks of a country is requisite, or
else the obligation to pay should not be confined to the place where the
bank is established.

CHAP. XVI. Here I resume the principles I have deduced, in a short
sketch of a general plan of regulations for a bank of circulation.

CHAP. XVII. If proper regulations upon the banking trade should be found
inconsistent with the laws and manners of a people, which require a more
extensive liberty to every one to carry on what commerce he thinks fit,
I think it is reasonable that every company of merchants who issue
paper, payable to bearer, without the sanction of government, should be
obliged to subject their books to some kind of public inspection, that
it might be seen whether the credit they grant to individuals be of a
sufficient solidity to answer for the notes they circulate.

CHAP. XVIII. The numberless distresses of the Scots banks at the end of
last war, made it necessary to show, in a particular chapter, what the
consequences might have been, had the banks at that time totally
withdrawn their credits, and given up business. This step would, 1_mo_,
have cut off their whole profits of banking. 2_do_, It would have ruined
the whole class of exchangers; and with them, 3_tio_, the whole trade
and manufactures of Scotland.

CHAP. XIX. Here I take a farther step into those intricate combinations.
I now shew how the whole obligation, both of paying in coin, and
discharging foreign balances, may be taken off from those who administer
a national bank. Their notes are proposed to be paid by a proportional
transfer of interest. All interest due by banks on that account, and to
banks for credit given, is proposed to be paid in coin at certain terms.
Those who have occasion for coin are to buy it at the mint: but this
coin is entirely calculated for domestic circulation; and therefore a
very moderate quantity of it will be necessary. And for the payment of
all sums due to foreign nations, I lay it upon government, according to
the plan proposed in the 5th chapter, upon exchange.

Thus the whole policy of circulation is divided into three distinct
branches:

1_mo_, The melting down of property, and keeping circulation full at all
times. This is the business of banks.

2_do_, The providing of coin is the business of mints.

3_tio_, The granting bills on foreign parts, for value in the national
currency, is the business of the state.

CHAP. XX. The objection to this doctrine is, that if notes are not
payable in coin, they cease to be of value. The answer is short. The use
of paper money is to keep reckonings of value between people who have
property; the use of coin is to avoid giving credit to people who have
none.

The value of the paper in the country is ascertained by the value of the
interest which is paid for it in coin; and by not paying the capitals in
coin, you prevent its being carried off without necessity, whenever a
balance becomes due; which balance might be paid by the means of credit.

CHAP. XXI. I shew, by many arguments, (afterwards employed in the 10th
chapter, upon public credit, and which render this combination more
simple than I should otherwise have been able to make it in this place)
that the return of a favourable balance of trade will clear the bank of
all the foreign debts contracted by it, for the relief of the country;
as a like favourable balance on the trade of Great Britain has the
effect of setting that nation free from a proportional part of the money
due to strangers. In this case, the favourable balance is incorporated
in the public funds due to natives: in the other case, it is
incorporated with the stock of the bank securities, and enables them to
relieve that part of them which was engaged for the interest paid out of
the country.

CHAP. XXII. The constitution of the bank of England differs essentially
in some particulars from that of banks upon mortgage, and private
credit. It is not so much calculated for multiplying the currency, by
melting down private property, as for facilitating the circulation of
the trade of London, and exchequer of Great Britain.

The grounds of confidence upon which the notes of this company stand are
very great.

1_mo_, A capital of eleven millions sterling, for which they are
creditors to the nation.

2_do_, A sum of credit-cash at all times in their hand, of about eleven
millions more.

3_tio_, The bills of exchange of all the great merchants of Europe,
which they discount.

4_to_, When they issue paper to government upon the faith of taxes, or
circulate exchequer bills, they have the security of the public faith
for the short advance of a few months.

This bank, I have said, is more useful for promoting circulation than
for augmenting it. It has however lent its assistance in this respect on
very critical occasions. It has circulated exchequer bills; and tallies,
which, from discredit at the time, were as ill calculated to supply the
use of money, as lands or houses are, from their unwieldy nature. The
great advantage the public reaped from such operations, abundantly shew
the utility of banks, which are calculated for that very purpose.

The principal operations of this bank are, to receive and pay away the
greatest part of all the national revenue, expences, and debts; to
discount bills of exchange payable at London, and to supply the country
with coin.

The demand of London for subsistence and manufactures from the country
of England is so great, that the whole amount of what is sent up to that
city, for taxes, and for land-rents there expended by the proprietors,
does not compensate it. From which it follows, that by the bank’s not
giving credit upon private securities, the whole of their paper is in a
manner confined to the capital; and if any part of that paper casually
goes into the country, it quickly returns, in payment of what would
otherwise be remitted in bills. So that paper circulation in the country
of England is very inconsiderable, when compared with the coin.

The intention of this chapter is to examine and compare the principles
of the two species of banking, and to point out their several
consequences as to circulation; from which I am led to think, that if
banks of circulation were to be established in the country towns of note
in England, they would greatly promote industry every where, and
occasion no inconvenience from their contrast with the national bank.

CHAP. XXIII. After deducing the principles upon which the solidity of
paper money is established, I proceed to point out the bad consequences
of issuing bank-notes upon a precarious security. The bank established
in France by Mr. Law, and the fatal catastrophe it brought upon that
nation, furnish excellent matter for illustrating the doctrine of paper
credit.

The late King of France left, at his death, a debt upon his kingdom of
142 millions sterling; the coin being at 28 livres the marc of silver.

CHAP. XXIV. In a few months after his death, the debt was reduced to 100
millions, by the turn of a wheel. The coin was put at 40 livres the
marc. But as the hundred millions sterling, _in intrinsic value_, after
the reduction, contained as many livres in _verbal denomination_, as the
hundred and forty millions did before, the greatest inconvenience
discovered by the people was confined to the necessity imposed upon them
to sell their old coin at the King’s price.

At this time Law set up his bank, and without doubt assisted people in
that respect, with very great benefit to himself.

CHAP. XXV. He divided the capital stock of the bank into 1200 shares, of
5000 livres each (the livre at this time was exactly a shilling
sterling); and the purport of the notes he issued was, that payment
should be made, at all times, in livres of the same intrinsic value.

This bank was established on the principles of the Scots banks, and lent
sums upon every species of good security. The consequence was, that in
less than three years, France, from being in the most miserable
situation for want of money, credit, consumption, and industry, was
raised, as by magic, to the greatest affluence. The reason was plain:
there wanted nothing but an instrument to set all the inhabitants to
work. This Law gave them in a moment; and their own work was the cause
of the affluence which astonished them.

This effect was produced by an inconsiderable sum of notes: they did not
exceed three millions sterling when Law gave up his bank. But credit and
confidence were established by that small sum; and the notes brought out
all the coin which had been formerly locked up. It is not a great
quantity of money, but an exact proportion of it, according to demand,
which supports trade and industry. That proportion may be sustained by
the means of banks, but by no other expedient whatever.

CHAP. XXVI. Law’s bank was no sooner established, than he sought to
enlarge his bottom. He found a trading company ruined in their affairs,
though intitled to great privileges. He found also large sums of public
state billets circulating at great discredit, from an ill paid interest.
He got a grant of the company to himself and associates. He opened a
subscription for 200,000 shares, of 500 livres each. He took payment in
those discredited obligations; and when he had got the state billets,
(given in at subscribing) he engaged the Regent to promise punctual
payment of the interest. This was no sooner done, than the discredited
paper, which was become an action, or a share, as we have called it,
only by being subscribed for to Mr. Law, rose above par. The nation
cried out, a _Miracle_! Law was a saviour, in the eyes of some, a
conjuror in the opinion of others.

His credit and his capacity for conducting the greatest undertaking
within the power of numbers and computation, being established, inspired
the Duke of Orleans with a scheme of unbounded ambition, which, in
favour of many who have never rightly comprehended the nature of it, I
have been at very great pains to trace, in the eight following chapters.
And as a recapitulation is useful to assemble ideas within a small
compass, which have been dispersed through many combinations in the work
itself, I shall here, in a few lines, give a general idea of the whole
plan.

The Regent perceiving the use of paper money, well secured on solid
property, resolved to take the bank into his own hands, in order to
issue paper sufficient to pay off the whole debt of France. Now paper
issued for paying debts is secured upon no fund at all. It is the same
as if it were issued for payment of meat and drink. The whole security
therefore was his own word.

But the difficulty was to prevent this paper from instantly returning
upon the bank; because it far exceeded all the uses of circulation, and,
consequently, could not be suspended in it.

The expedient fallen upon was to raise the value of the actions of Law’s
company, (which by the subsequent incorporation of new privileges were
multiplied beyond 600 000) to a great height, by promising great
dividends upon them. The company accordingly promised a dividend of 200
livres a year, upon a capital which was originally worth no more than
500 livres.

The great quantity of paper money dispersed had sunk the rate of
interest to 2 _per cent._ The dividend, therefore, combined with the
rate of interest, carried the market price of the action to 10 000
livres. Here was a new fund provided as an outlet for all the bank notes
paid to the creditors; and in proportion as they bought the actions from
the Regent, or the company, whom I here consider as the same, the notes
were to be cancelled.

By this operation all the debts of France were to be converted into
actions of the company of the Indies, and were to share its fate. But
then it must be remembred, that this company had in a manner the whole
revenue of France in farm; and by a recapitulation of the different
branches of their profits, their income amounted to eighty millions of
livres a year. So that if matters had been well managed, had credit been
supported by fair dealing, had no arbitrary acts of power, in tampering
with denominations of coin and money, taken place, and had the Regent
supported and encouraged the company; they in fact might have been able
to pay more than all that was required of them; and the very diminution
of the interest of the public debts, by the fall of money to 2 _per
cent._ was, in effect, cutting off one half of the capital. So that if
we suppose the total value of the 2000 millions of debt equal to 100
millions sterling, the debts of France, by this scheme, would have been
reduced to an annuity of 2 _per cent._ on a 100 millions, or two
millions sterling a year paid to the company, who then represented the
creditors of the nation.

But the project was too great; the capacity of those who were in the
management was too small, and the time was too short for bringing about
so great a revolution: thus it failed; but in a way which suggests no
reason to believe that it might not have been supported.

CHAP. XXXIV. The denomination of the paper was reduced to one half by an
act of power: a man who, for example, had a bank note for 100_l._ had it
reduced to 50_l._ This at once destroyed the whole credit of France. But
it would have stood its ground, without doubt, had the Regent called the
fifty pounds with which he paid such a note, one hundred pounds;
although, if you abstract from the interests of debtors and creditors,
which never were attended to, it was absolutely the same thing. The
altering the denomination of paper implies, however, this additional
injustice above that of altering the denomination of coin, that it
changes the value of the paper in all cases; because it contains no
other value than the denomination: whereas coin has a value independent
of that, which no law can alter.

CHAP. XXXV. The form of a bank proposed for France, in this chapter, is
pretty much the same with that mentioned in chap. 16; only here I have
not even admitted the payment of the interest in coin, for fear that an
act of power, by carrying off a few thousand louis d’ors on a present
exigency, might totally ruin the credit of such a bank, and consequently
draw ruin on the whole nation.

This bank is intended merely as an office for keeping accounts between
people of property, and thereby of greatly increasing and supporting
circulation.

CHAP. XXXVI. Having dismissed the subject of banks of circulation, I
come next to those of deposit. Here I deduce the principles upon which
the bank of Amsterdam is established.

This bank issues no paper, and grants credit upon no security but coin
locked up in their vaults. Consequently, the ground of their credit is
the faithful preservation of this coin. Were it at any time to be
diminished below the value of the credits written in their books, the
nature of the bank would be changed. Were the coin to be lent on good
security, such a bank would then immediately become a bank of
circulation upon mortgage; since it would be the same as if the credit
had been at first granted upon that security. Were the coin disposed of
for no value, the bank would be from that moment bankrupt in fact,
although the secret might be kept for a long time.

CHAP. XXXVII. The intention of establishing a bank of this nature at
Amsterdam was to fix the seat of trade in that city. The ordering all
bills of exchange to be paid to the bank in coin, and the giving to the
holders of the bills only a credit in bank for the value, was an
effectual means of obliging the proprietors of that credit to carry on
their trade in the place where their funds were established beyond a
possibility of removing them, except by transferring them to others who,
by accepting of the transfer, came under the same necessity. Were indeed
trade to become incompatible with the situation of the city, as if an
earthquake should fill up the port, then the bank would either be
removed elsewhere, or the credit writ in their books would become of no
more value than gold in an inaccessible mine. This regulation also
prevented the circulation of bad coin; because when payment of bills was
made to the bank, they took care that nothing but good coin should be
received.

From these regulations it appears that money cannot be multiplied by
banks of deposit; but on the other hand, it cannot be diminished by
exportation, without the act of the bank; and the transfer of credit
answers every use of coin in trade, and prevents also its waste in
circulation.

CHAP. XXXVIII. Coin is liable to constant vicissitudes. Its denomination
may be changed by an act of power, and its real weight may be diminished
in circulation. But when it is locked up, all these inconveniences are
prevented. Bank money, therefore, being the value of the coin locked up,
is constantly the same: whereas all coin which circulates is liable to
variations; consequently, these variations are relative to the coin
which circulates, and not to the bank-money. The difference between the
one and the other is called _agio_.

CHAP. XXXIX. Many have imagined the treasure of the bank of Amsterdam to
be immense; because no body can ever take any thing from it, and that it
is constantly receiving new augmentations: but the policy of the bank
itself destroys this supposition, and shews plainly, that the sum locked
up never can exceed what is absolutely necessary for circulating the
trade of the city.

It is true, no person can go to the bank and demand to have the amount
of his written credit paid him in coin. But were the written credits to
exceed the uses found for them, the value of such bank-money would
diminish; consequently, the value of the circulating coin would
increase, which is the same thing. Now as this would prove a great
discredit to the bank, they employ a set of cashiers or brokers to keep
the balance even. Their business is to buy and sell bank credit with
current coin, and to these the bank gives credit. When there is a demand
for bank credit, the cashiers sell it for coin, and both parties going
to the bank, a new credit is written, or the cashier’s credit is
transferred to the buyer. When, on the other hand, coin is demanded for
bank credit, the cashiers pay for it with coin which the bank lends
them; and for their repayment, they transfer to the bank the credit they
have bought with it. This needs a little explanation. Suppose one to
have credit in bank for a thousand gilders, which he wants to send away
in coin. He goes to the cashier and sells his thousand gilders of bank
credit: the bank lends this thousand gilders to the cashier, and the man
who sells the credit gets the coin, and makes a transfer of the credit
in favour of the cashier. But as he owes this sum to the bank, he
transfers this credit to the bank itself, in payment of the thousand
gilders borrowed; and then the bank may expunge it, if they please, from
their books; because it is due to themselves. Thus although no money can
be demanded of the bank by one who has credit, they can give the money
to a third party who does it for them.

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                        PART III. _Of Exchange._

CHAP. I. Foreign circulation is carried on by bills of exchange.

When reciprocal debts are contracted by different countries, the
creditors in both take payment at home for the bills they draw to the
order of those who pay; and they again indorse the bills to their
creditors abroad.

In this contract four parties concur: the domestic and foreign
creditors; the domestic and foreign debtors. This operation can extend
no farther than to the amount of reciprocal and equal debts; if there be
a balance owing upon one side, this balance must be paid in value,
either in money or merchandize. Now as a debt is much easier discharged
by compensation than by payment, merchants endeavour to profit of this
compensation; but as every one endeavours alike when there is a balance
on one side, it operates upon the whole of the exchange, and every one
must bear his share of the expence of paying it.

If London should owe a balance to the world, after compensating all that
the world owes to her, every London-debtor to the world will wish to
compensate; consequently, he will look out for one who is creditor to
the world: but this search betrays the secret, and shews that he is the
demander; upon which the other avails himself of his situation, and
refuses to compensate without profit. Hence the secrecy said to be
requisite in this branch of trade. It is requisite to the trader only,
whose interest is concerned; because whatever one set of merchants in a
place wish to conceal, another set have constantly an interest to
divulge. The interest of the state consists in preserving an equality of
profit and loss among them all; and in facilitating to them the paying
and receiving the balances due upon the total of all their transactions.
The loss of the nation is upon the balance due by the country; the
expence of paying the balance, which is the price of exchange, is only a
relative loss to some of her subjects, and a relative gain to others.

The attention, therefore, of a statesman in what regards exchange, is,
1_mo_, To take care that the true par between the value of the national
money and the money of other nations, shall be as much as possible
proportional to the quantity of metal contained in each.

2_do_, To remove domestic inconveniences in paying with the metals, or
national coin, every unavoidable balance.

3_tio_, To hinder the expence of acquitting a small balance from
occasioning a loss on the compensation of reciprocal debts.

And, 4_to_, When he finds an inconvenience in allowing the metals or
coin to go out of the country, he must assist in having the balance paid
in the way of credit.

CHAP. II. The best method for 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 two
places exchanging; and to state the difference only, as the price paid
for the exchange. To render this more practicable, a proposal for
rendring all mint-weights more determinate is set forth in a note.

CHAP. III. When upon the whole of a nation’s trade with the rest of the
world, a balance is due, it must be paid, either in intrinsic value,
which totally discharges it, or by giving security for it, and paying
interest until the charge can be obtained. We consider in this chapter
the methods of discharging it.

A statesman is the best judge when his people ought to pay with bullion,
and when with credit. If he approves of their paying with bullion, that
is, with gold and silver, he should render the exportation of the metals
as easy as possible. If a duty be laid upon coinage, he need not be
afraid that any one will send off the coin, as long as bullion can be
found; and when this runs short, if he does not choose that his coin
should go out, he must lend his assistance in paying with credit. If he
finds it against his interest either to pay in one way or in the other,
he must put a stop to the trade which creates the balance: for while
such trade is permitted, he will find it beyond his power to prevent the
payment of that balance in the most hurtful way possible to his country.

I here observe, that in countries unacquainted with trade, and in others
where the whole external commerce is carried on by strangers, a good
expedient for cutting off such hurtful branches of traffic is to lay all
the restraints possible on the exportation of the metals, in order to
promote the exportation of what the country can offer in return. But
when trade and industry are established, these restrictions cease to be
useful; because merchants then find a profit upon exporting domestic
productions, which they never can have upon exporting an intrinsic
value.

A statesman, therefore, should conduct his operations according to the
situation of his country. If foreign trade be unprofitable, cut it off
as much as possible, and lay every restraint upon the exportation of
coin. If it be profitable, lay no restrictions on payments; because you
are sure you will gain upon the whole. And if, in any particular case,
you incline to keep your coin at home, mortgage your country, and pay
with your credit.

If, when you are obliged to check foreign trade, and lay prohibitions on
the exportation of coin, exchange is found to rise to a great height
against you, yet will this exchange produce no national loss: it will be
paid within the country by those who consume foreign commodities, to
those who are at the trouble and expence of transacting the balance.

CHAP. IV. Here I demonstrate what before I had in a manner taken for
granted, viz. that the price of exchange is neither a national loss, or
a national gain; but whether it be favourable or unfavourable, it
produces an instability in the profits upon trade, and should therefore
be kept at par by all possible methods. I also shew how exchange is
favourable to exportation, when the balance is against a country, and
how the exchange is unfavourable in that respect in proportion as the
balance is for that country: and as whatever exchange is gained by
exporters is lost by importers, and _vice versa_, some have concluded,
that an unfavourable balance does of itself destroy its own pernicious
effects, and sets the balance even. I endeavour to disprove this
proposition, by shewing how the importers are indemnified, as to their
loss by the exchange, from the additional price they get for their
foreign commodities at home; whereas the exporters cannot raise their
prices abroad; because foreign competition will not permit them. So that
in one case the wrong balance hurts the rich consumer at home, who can
bear the loss; and in the other, the right balance hurts the poor
manufacturer, who cannot. Hence I conclude, that it is greatly for the
interest of a trading state to keep exchange, at all times, as nearly at
par as possible.

That this is a practicable scheme, I prove by a matter of fact, and by
an experiment made in France by a late minister; where, upon a certain
occasion, the exchange having risen to a great height against France, he
immediately brought it to par, by ordering bills upon Holland to be
furnished at that rate, to those who should demand them; and by taking
upon himself the expence of sending the money paid for such bills, to
the place upon which they were drawn.

I observe, however, that such operations can only be recommended to
statesmen who preside over the interests of flourishing trading nations;
because in proportion as they are benefited by facilitating the payment
of the casual balances due by them from time to time, in so far is a
prodigal nation hurt, by facilitating the dissipation of their property,
and by contriving a ready method of transferring it to foreigners.

CHAP. V. When a nation owes a balance, after all the payments they have
been able to make, either in coin, bullion, bills, or merchandize, it is
evident, that what remains can only be satisfied by obtaining credit for
it, at the expence of mortgaging the country and paying interest for the
remaining balance. When this, however, happens to be the case, it
involves the nation-debtor in a multitude of expensive operations
conducted by exchangers, who constantly find a profit in carrying them
on, though at a very great loss to individuals within the country. To
prevent this inconvenience, I propose, that the statesman should take
upon himself the obtaining of credit abroad, for the balance due by the
country he governs; and that the expence incurred by this operation
should be defrayed by the public, whereby every individual within the
state will contribute his share towards maintaining an uniformity in the
profits upon trade, and supporting the stability of commerce, from the
regularity of the course of exchange at all times. This operation
resembles very much another of which we have already spoken in treating
of banks of circulation upon mortgage. There we recommended the payment
of foreign balances as a proper branch of bank administration: here we
recommend it to a statesman to interpose voluntarily between his
subjects and their foreign creditors. This is the best method of
supporting commerce, when it happens accidentally to fall under the
discouragement of an unfavourable balance.


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                      PART IV. _Of Public Credit._

CHAP. I. The credit of a state resembles, in most things, that of an
individual: they differ however in this, that when a private man
contracts a debt, he himself is answerable for it. When a state
contracts a debt, those who contract the obligation in the name of the
state are not responsible for it. Hence it happens, that private people
are commonly more anxious about paying their debts than statesmen are
who administer for the public. Another difference is, that public debts
do not so much affect the prosperity of a state as private debts do that
of the debtor. The interest of a private debtor is simple and
uncompounded; that of a state is so complex, that the debts they owe,
_when due to citizens_, are, on the whole, rather advantageous than
burdensome: they produce a new branch of circulation among individuals,
but take nothing from the general patrimony.

In deducing the principles of public credit, we must suppose it the
established maxim in the state to adhere to the faith of their
engagements; and that a permanent fund is appropriated for the payment
of the interest of all the money borrowed: a liberty must be supposed,
at the same time, to redeem the obligation by adequate payment; and also
an easy transfer of the capital from hand to hand, to indemnify every
creditor for the loss of his capital, which is not demandable from the
state, as the case commonly is in private securities.

The consequence of the swelling of public debts, is, to occasion a
proportional augmentation of contributions out of private property. The
consequence of this again, is, to produce a vibration in the balance of
domestic wealth. This creates a monied interest, which swells in
proportion as public debts increase; and which may swell to so great a
height as to transfer the income of a whole nation from the nominal
proprietors to the public creditors.

A statesman, therefore, ought carefully to attend to the spirit of the
nation he governs, before he gives way to a regular and systematical
augmentation of public debts. In monarchies, the proprietors of lands
may bear for a while the temporary diminutions of their annual income,
though they will not easily be made to subscribe to a plan which
evidently tends to deprive them of all they have, and to transfer their
power and property to a set of men whom they have always considered as
their inferiors.

In monarchies, therefore, a great increase of public debts will more
probably bring on a national bankruptcy, than in governments which
participate of the republican form.

The consequences, therefore, of the swelling of public debts may be,
either, 1_mo_, To disturb the tranquillity of the state, by an attempt
to transfer the property of it from the real possessors to a new created
monied interest: or,

2_do_, If a systematical plan of borrowing upon solid security be not
laid down, it may mechanically draw on a general bankruptcy: or,

3_tio_, If debts be allowed to swell beyond due bounds, so as to hurt
the interest of the great body of the proprietors, the state may be
engaged to adopt the fatal expedient of a spunge: or,

4_to_, If the spirit of the people prove compatible with the system of
borrowing and supporting public credit to the utmost extent, then the
whole income of the nation will remain in perpetual fluctuation, passing
from one set of creditors to another, the statesman still retaining the
administration of it for their use: or,

5_to_, If the debts contracted become the property of foreigners, these
will either remove into the country where their funds are, or the income
of the whole will be converted into a foreign tribute.

CHAP. II. While public expence was defrayed from treasures, public
credit was a thing unknown. While supplied from rapine and extortion, it
never could exist. During the simplicity of ancient manners, when there
was neither industry or circulation, credit was unnecessary: the coin
was more than sufficient to serve every purpose of alienation.

When trade and industry began to make a progress in Europe, in the Hans
towns, and in the republics of Genoa and Venice, the consequences of
their credit were soon felt by Princes, who aukwardly began to imitate
their example; first, by borrowing money upon mortgages of their lands
and principalities; and afterwards, by imposing taxes and selling them
for what they could get to a most rapacious set of men, the
tax-gatherers. This spread oppression, and this again soon brought the
Prince to poverty.

Taxes, however, once established in this violent method, and upon urgent
occasions, came, in time, to be improved, and formed a large fund, which
now serves as a solid basis for public credit.

CHAP. III. While taxes were only appropriated for a time, for the
repayment of the debts contracted by a state, the attention both of the
state and of the lenders was totally fixed upon the discharge of the
capitals: but in proportion as money increased, in consequence of the
whole system of modern political oeconomy, the lenders formed to
themselves a new point of view, viz. the acquisition of a permanent
interest arising from a transferable capital.

In order to make this change of policy from borrowing with an intention
to repay the capital, to borrowing with an intention to pay a perpetual
interest, the more sensible, I have traced in this chapter the progress
of the first, by a review of the plan of public credit in England until
the end of the last century.

Here I analize briefly the sentiments of Dr. Davenant, and compare them
with those established in our days, when the latter policy has taken
place; and upon the whole I determine, that the difference in the system
of public credit then and at present, has proceeded principally from the
difference in the state of circulation, and from the expedients now
fallen upon for increasing the quantity of money, in proportion to the
uses found for it.

CHAP. IV. I then compare the state of public credit in France, during
the administration of Cardinal de Richlieu, with that of England after
the revolution. Here I endeavour to point out the influence which the
different forms of government have upon the stability of public credit,
both in contracting and in paying off public debts.

In France, the power of the Prince furnishes many expedients for paying
off capitals, which had been borrowed at an exorbitant interest in times
of public distress.

In England, the limited power of the crown, and the responsibility of
ministers for their exercise of it, is a great security to those who
lend money to the state; and consequently, proves a very great advantage
in contracting debts upon reasonable terms.

The longer the two states subsist, the greater will the advantage be
found in favour of that which adheres the most strictly to the faith of
its public engagements.

When the credit of France and England are compared together, the
difference between them is most remarkable. The strict adherence to the
faith of public engagements has established, in England, so nice and
scrupulous a credit, that the smallest deviation from its principles may
prove fatal to the whole system. The credit of France, on the other
hand, has been accustomed to a rougher usage; and the frequent acts of
power, to the prejudice of creditors, rather occasion a temporary damp
than a total destruction of their credit for the future. Such acts of
power, however, in critical circumstances, prove extremely hurtful; and
the advantage of a well established credit will, in all probability,
either open the eyes of that nation to their own interest, or bring
calamities upon them, which now appear little to be feared, in their
present situation.

CHAP. V. This chapter contains a short sketch of the plan of public
credit, as carried on in Great Britain, from the end of the last
century, to the conclusion of the peace in 1763. I here enumerate the
principal operations, calculated for enlarging the fund of British
circulation, by engaging the bank of England to turn into money the
discredited bills and tallies of the exchequer. I have pointed out the
principle which circumscribes this power in the bank within certain
limits. I have traced the progress and fluctuations of the interest of
money; which have constantly been in proportion to the demand for
borrowing or lending in the market at the time. I have mentioned the
rise of the sinking fund, and the use which has been made of it. I have
endeavoured to explain the methods of borrowing by _premium_, and have
pointed out the inconvenience attending that plan, as long as the
principal view of diminishing a nation’s debt is confined to expedients
for lowering the interest of the capital. I have given a progressive
state of the augmentation of the debts of Great Britain at the end of
every war; to which I have subjoined a short state of the nation at the
last peace.

I conclude my chapter, by assigning reasons for the present low state of
public credit in Great Britain; which has been principally owing to the
large sums of borrowed money invested in the funds before the peace,
upon the prospect of a sudden rise in their price, on the return of
public tranquillity. This rise would, undoubtedly, have happened, had it
not been obstructed by the necessity which the nominal stockholders were
put to, of bringing their funds to market, in order to answer the
demands of those from whom they had borrowed what they had invested in
stock: and until this operation be compleated, that is, until the funds
of Great Britain become vested in the real proprietors of them, the
state of public credit will constantly be undetermined.

CHAP. VI. Having given a short sketch of the present state of public
credit in England, I endeavour, in this chapter, to extract, from the
best private authorities to which I could have access, a parallel view
of the affairs of France, so far as relates to its revenues, taxes, and
debts, at the peace 1763.

By the revenue of France, I here understand, not only what comes clear
and nett into the King’s coffers, but also what is farther levied upon
his people. The parallel therefore will not hold between the revenue of
France and that of England, as represented in the preceeding chapter,
without attending to this difference.

The nett revenue of England charged with all its debts and expence of
government, we have said to amount to 10 213 000_l._ The gross revenue
of France, on the other hand, appears to amount to 24 740 834_l._
sterling.

But if from this be deducted that part which never enters the royal
treasure, and which is expended in levying the revenue, and in
appropriations for particular perpetual expences, to the amount of 6 815
111_l._ sterling, there will remain of net income, paid into the King’s
coffers, and charged with all the debts and expence of government, only
17 925 723_l._ sterling.

If from this sum we deduct the total amount of the net revenue of Great
Britain, (10 213 000_l._ sterling) the remaining sum of 7 712 723_l._
sterling, will shew the excess of the French revenue above that of
England.

The foregoing sum of 17 925 723_l._ sterling, arises from the following
branches:

1_mo_, Those which compose the King’s ordinary revenue; which, at the
peace 1763, amounted to 12 546 666_l._ sterling, burdened with the
payment of 2 022 222_l._ sterling of interest of the debts charged upon
it.

2_do_, The extraordinary taxes established for a limited time, after the
peace of Aix-la-Chapelle. These amount to 2 326 133_l._ and are totally
appropriated for the payment of capitals, and interest upon them,
incurred during the late wars, according to the principles of public
credit in practice in England, during the reign of K. William and Q.
Anne: and so soon as this fund has cleared the charges upon it, it is to
cease, being no permanent branch of revenue.

3_tio_, The extraordinary revenue raised on account of the last war.
This amounts to 3 052 923_l._ sterling, and consists of the second and
third twentieth penny, granted for a very limited time, and
appropriated, as the former branch, for discharging the debts lately
contracted. The sum of these three branches made the total of the 17 925
723_l._ paid in to the King’s treasury, and burdened with all the public
debts.

If we therefore suppose the two last branches of French revenue to be
continued until all the debts charged upon them are paid, then we shall
find the state of that kingdom reduced to the King’s ordinary revenue of
12 546 666_l._; from which however must be deduced at least one half of
the capitation. This half amounts to 1 182 222_l._ sterling, and is so
burdensome, that its continuance will be impossible. The revenue
therefore will be reduced to 11 364 444_l._ sterling, charged with 2 022
454_l._ sterling, interest of debts; of which indeed 711 111_l._ are
annuities upon lives, and must therefore be extinguished in time.

According to this view, the revenue of France will be 11 364 444_l._
sterling, charged with the annual payment of 2 022 222_l._ interest of
debts: and the revenue of Great Britain is 10 213 000_l._ charged with
the annual sum of 4 860 000_l._ interest of debts.

What remains free for France is 9 342 222_l._ sterling; and for England,
5 353 000_l._

But out of this free revenue of France must be deducted the permanent
articles of expence charged upon the ordinary revenue, exclusive of the
interest of debts already deducted. These articles amount to the sum of
8 468 889_l._ which being deducted from 9 342 222_l._ leaves a free
balance of no more than 873 333_l._

On the other hand, if we suppose the net amount of the revenue of Great
Britain, after paying the interest of its debts, to be, as above, 5 353
000_l._; and if the expence of the current service of the year,
including the civil list, be supposed to amount to 4 800 000_l._
sterling, as it nearly did, before the commencement of last war, there
will remain of free balance 533 000_l._[54]

Footnote 54:

  But if the current annual expence should not exceed 3 600 000_l._ or 4
  400 000_l._ including the civil list, which is nearly the present
  estimate, we may then add 400 000_l._ to the free balance, and state
  it at 950 000_l._ in round numbers.

From all which we may conclude, that, abstracting from extraordinary
supplies for extraordinary exigencies, the revenue of both nations is
pretty nearly in proportion to their current expence; and, therefore,
their respective powers, when engaged in war, will be in proportion to
their credit at the time.

CHAP. VII. In comparing the credit of the two nations, two things enter
into consideration. First, the confidence of the world, in the solidity
of their respective public faith. This I take to be totally in favour of
the British nation. The second is, the solidity and extent of the funds,
which are to be provided in security of the sums to be borrowed upon
future emergencies. These resources, in France, we have seen to consist
in their dixiemes, vingtiemes, double capitation, and extraordinary
impositions upon the clergy, and other bodies politic; taxes so
burdensome in their nature, and so contrary to the spirit of the French
nation, that it is hardly possible they ever can be made so permanent as
to answer any other purpose than a short temporary appropriation.

The true resources of France are confined to those taxes upon
consumption above enumerated, which do not enter into the ordinary
revenue, and which are now imposed and appropriated only for a time.
When these taxes become free, they may no doubt be rendered perpetual,
and appropriated for a future fund of credit.

On the side of Great Britain, the case is different. The greatest part
of her revenue is already perpetual; and the only two branches of annual
grants, the land-tax and malt-duty, are not so excessively burdensome,
nor so repugnant to the genius of the people, as to render the raising
of them at all precarious. And were this nation once to adopt the system
of raising money, in time of peace, sufficient to defray the charges of
government, the sinking fund would prove a resource for the future, far
above any thing that France can boast of.

CHAP. VIII. Having by this short sketch of the state of credit in Great
Britain and France, prepared a sort of canvass for our farther
reasoning, I proceed to apply principles to some combinations, which
might be formed concerning the consequences of an over-stretched credit.

In proportion as credit is used for borrowing money to be sent abroad,
either a supply of currency must be provided for filling up the void, or
alienation, trade, industry, &c. must suffer a check.

And even if money should be borrowed to be spent at home, an additional
quantity of it must be added to circulation; because this new expence of
the state will require it.

Every fund of property may be converted into money, with the assistance
of credit, providing the statesman lends his hand to the operation: and
the fundamental principle for supporting credit of all kinds, is, to
provide every one with money who has property to pledge for it.

When money is borrowed by a state, to be spent abroad, the loan must
either be made in coin, or in paper. If in the first, it is exported;
because coin is the money of the world: if in paper, it must either be
converted into coin, and exported, or it must be remitted by bills,
drawn upon countries, debtors to England, for example; or, in the last
place, it must be paid in the way of credit, by constituting England
debtor to the Continent for it. When it is paid by bills drawn upon
countries, debtors to England, then the consequence of such a loan is to
convert the balance of trade into a capital in the public funds.

In whatever way money is borrowed by a state, whether from natives, or
foreigners, the consequences are the same. The operation of a favourable
balance of trade will transfer what is owing to foreigners in favour of
natives; and a wrong balance of trade will transfer the property of
natives to foreigners.

If no check be put to the augmentation of public debts, if they be
allowed constantly to accumulate, and if the spirit of a nation can
patiently submit to the natural consequences of such a plan, it must end
in this, that all property, that is income, will be swallowed up by
taxes; and these will be transferred to the creditors, the state
retaining the administration of the revenue.

The state, in that case, will always consider those who enjoy the
national income as the body of proprietors. This income will continue
the same, and the real proprietors will pay the taxes imposed; which may
be mortgaged again to a new set of men, who will retain the denomination
of creditors; until by swallowing up the former, they slip into their
places, and become the body of proprietors in their turn, and thus
perpetuate the circle.

CHAP. IX. But as a thousand accidents may put an end to public credit,
before such intricate revolutions can be accomplished, the consequence
must be a bankruptcy. This may either happen by a deliberate act of
government, or from the natural consequences proceeding from an
over-stretched credit.

I here endeavour to shew, that it is impossible to form a supposition of
circumstances, in which a deliberate act of bankruptcy can be a prudent
measure. The only end that could be proposed to be attained thereby,
would be, to relieve those who are oppressed by taxes. But a sudden
abolition of taxes would have the effect of ruining the landed interest,
as well as all the manufacturing classes. Sudden revolutions are
constantly pernicious; and no revolution can be so sudden as that of a
bankruptcy. If such a revolution should happen, from circumstances which
can neither be foreseen or prevented, the best expedient would still be,
to adhere, as much as possible, to the faith of public engagements;
because no expedient would be so productive of good consequences, in
such a calamitous situation.

While the debts of a nation are due to its subjects, and while there
remains any balance due in favour of the nation, no increase of debts
can _necessarily_ bring on a bankruptcy. It is a contradiction to
suppose that a nation can become bankrupt to itself. But when, on the
general state of payments between a nation and the world, there is found
an annual balance due, which cannot be compensated either in the way of
payment, or in the way of credit, then indeed a bankruptcy becomes
unavoidable.

From this reasoning we may conclude, that the method of determining the
exact extent of public credit, is to keep a watchful eye upon the
increase of debts due to foreigners, and to compare these with the
favourable balance upon the trade of the nation. When those debts and
this balance begin to draw near to an equality, if part of the capital
of the public debts be not immediately paid off, by an augmentation upon
public contributions, the infallible consequence will be a
state-bankruptcy.

CHAP. X. The first requisite for contracting public debts, is to
establish a fund for fulfilling public engagements. This procures the
confidence of the lender. The next is, to establish an extensive plan of
credit at home, which may be sufficient at all times to keep circulation
full.

When, from the effects of borrowing, too great sums are, from time to
time, drawn out of circulation, the void must speedily be filled up. If
this be neglected, taxes will not be paid, as has been often observed:
besides, if money be allowed to become too scarce, in proportion to the
demand for it, interest will rise, and borrowing will become
proportionally more burdensome to the state in general.

Foreign expence frequently drains the fund of circulation at home: hence
a multitude of inconveniences arise. To prevent these, I suggest a new
scheme of borrowing, by opening subscriptions in foreign countries where
the interest is annually to be paid. This being to be remitted by the
country borrowing, a statesman may, with the greater ease, obviate the
inconveniences which might arise to circulation from such remittances.

In this chapter, I endeavour to prove by new arguments and
illustrations, that national distress is more owing to a scanty
circulation, than to circumscribed property; and a statesman who
neglects to employ every method for keeping up the circulating
equivalent within the state he governs, to the full proportion of all
the uses found for it, fails in the most essential requisite for
promoting the prosperity of his people, and the establishment of his own
credit.

Having pointed out the methods of contracting debts, I proceed to the
method of paying them. This may be accomplished in six different ways,
by the help of a sinking fund; which,

1_mo_, May be applied annually, to the discharge of certain capitals, at
the option of the state. Or,

2_do_, According to a certain rule, to determine the preference.

3_tio_, By appropriating the fund, for the payment of a proportional
part of the whole outstanding capital. Or,

4_to_, By reducing the interest of the capitals. Or,

5_to_, By converting the whole of the capitals into determinate
annuities, proportionate to the extent of the sinking fund. Or,

6_to_, By the means of lotteries, where the state may gain what
gamesters are willing to lose.

I point out the advantages and inconveniences of every plan. The first
five expedients are too plain to require a recapitulation. The sixth
amounts briefly to a supposition, that the interest of the public debts
is brought, by a proper chain of administration, to a lower rate than in
any other part of Europe. In this situation, accidental circumstances
will occasion (as at present) fluctuations in the price of the stocks.
When they fall below par, let government open subscriptions for
lotteries, to be paid in stock at the market price. Subscriptions also
might be opened, and the old capitals might be received at the market
price, and constituted a-new at the current interest, with a small
premium above the rate at the time. By such means, the sum of the old
capitals would be reduced, and a small benefit would accrue to the
subscribers. Then, upon the rise of the stocks, the interest on these
subscriptions might be reduced again; from which a double benefit would
result; the price of stocks would be supported on one hand, and the
capitals of the public debts would be reduced on the other.


                               CHAP. XIV.
                  _Recapitulation of the Fifth Book._


                              _Of Taxes._

INTROD. Having already explained the effect of taxes upon domestic
circulation; it now remains to investigate the principles by which they
are to be imposed on their proper objects.

CHAP. I. I divide taxes into proportional, which affect consumption, or,
more properly, what may be called expence; cumulative, which affect
property; and personal, which consist in personal service. These I
explain by giving examples of each.

CHAP. II. Proportional taxes may be so imposed as to affect almost every
expence of living; and as all expence should arise from income, not from
stock, the first principle of taxation, is, to confine all impositions
to income only: whatever affects a capital is oppressive and unjust. But
as in all expence there is alienation, although in all alienation
expence is not implied, the best method to avoid the mistake of taxing
stock instead of income, is, to impose the tax in such a manner as to
affect the consumers only; in which case, whoever buys to sell again
will draw the tax completely back.

CHAP. III. In this chapter, I fully explain the operation of drawing
back proportional taxes.

When the commodities charged with such taxes are either not consumed by
purchasers, or by the industrious classes, they are constantly drawn
back, except so far as the consumption made by the latter is an article
of superfluity.

Hence I conclude, that the price of _labour_ is raised by proportional
taxes, in proportion to industry only, though the price of the
_commodity taxed_ be raised in proportion to the tax. Consequently, the
more taxes are found to increase the price of labour, the more we may
conclude in favour of the industry of the manufacturing classes: and the
more they bring into the exchequer, the more we may conclude in favour
of the ease and opulence of those who consume the objects of such taxes.

CHAP. IV. The proper object of cumulative taxes, is the large
possessions of the higher classes of a people, which can bear a
diminution in favour of the state, without danger of encroaching upon
their necessary or easy subsistence. It is not so when they are laid
upon the lower classes; because these are either composed of the
industrious, or of beggars. The first should be enabled to draw back
from the rich, what they advance for the public service. The latter have
nothing to give; to tax them is but adding to their misery, without
relieving the wants of the state.

The great advantages of proportional taxes over the cumulative, may be
reduced to three.

1_mo_, The proportion between the tax and the object taxed is
determinate.

2_do_, The proportion may be known to every body.

3_tio_, The time of paying the tax is regular and gradual; because in
paying for the commodity you pay for the tax, and your liberty in buying
such commodities is unrestrained; consequently, the expence is supposed
to be in proportion to what your income can afford. Whereas in the
cumulative taxes, it is, first, hardly possible to preserve the
proportion between the tax and the ease of a person’s circumstances. In
the second place, it is impossible for the state to ascertain exactly
that proportion. And in the last place, the demand for the tax is made
at a time when people are often unprepared.

CHAP. V. The principal inconveniences alleged against proportional
taxes, are, 1. That they raise prices: 2. Discourage consumption: and 3.
That they are oppressive and expensive in the collection. These
inconveniences are more apparent than real, as will appear from what
follows.

1_mo_, A proportional tax, rightly imposed, and properly levied, will
undoubtedly raise the price of the objects taxed; but it will only
consequentially raise the price of the labour of the industrious man who
pays it; because he will draw it back in proportion only to his
diligence and frugality.

The price of labour is _regulated_ by demand, and is _influenced_ only
by proportional taxes.

2_do_, As to discouraging consumption, if taxes raise prices, this
circumstance proves the increase of consumption; because if consumption
were to diminish, taxes would not be paid, and prices would fall of
course, even to the detriment of the industrious. These are always the
consequences of proportional taxes, when wrong imposed.

3_tio_, As to the expence and oppression in levying them, these
inconveniences are, in a great measure, in proportion to the disposition
of the people to defraud the public: for when they are fairly paid, and
honestly collected, proportional taxes are little more expensive, and
infinitely less oppressive than any other. I conclude my chapter by some
observations drawn from the practice of different countries, which point
out a method of avoiding both the oppression and the expence of levying
proportional taxes.

CHAP. VI. All taxes are paid out of the circulating money of a country;
consequently, they cannot exceed a certain proportion of that sum. It is
not, therefore, from the value of the property, or the quantity of
consumption, that any one can form a guess of the probable amount of
taxes, so much as from the easy and expeditious circulation, which
facilitates alienation and sale.

Were taxes, indeed, paid in kind, they might bear a proportion to fruits
and labour; but then they would diminish the fund of subsistence:
whereas they now draw a share of that quantity of money which circulates
through the hands of every individual.

The great difference between cumulative and proportional taxes, consists
in this. That in the first, he who pays them cannot draw them back in
proportion to his industry; in the last, he may: but so far as any one
of an industrious class proves idle or extravagant, every proportional
tax will affect his daily profits, as every cumulative tax will affect
the income of a fund already acquired. This deduction of principles is
of great use in imposing taxes; because it points out the method of
giving to many cumulative taxes usually imposed on the lower classes,
all the advantages of those of the proportional kind.

CHAP. VII. Taxes ought to be imposed for the benefit of the public, not
of private people: and while that object is fulfilled, taxes are
beneficial in every respect. When they are properly levied, they only
abridge unnecessary private expence: when they are properly applied by
the state, they advance improvement every where; and those who have
fortunes already acquired, will be brought to contribute to the ease of
the lower classes.

Thus by the help of cumulative and proportional taxes, rightly imposed,
and rightly expended, circulation is greatly increased; industry is
advanced; the public good is augmented, not diminished; and the burden
of payments becomes so equally proportioned, as not to be felt in any
degree sufficient to overbalance the advantages resulting from the
general system.

CHAP. VIII. Having said that cumulative taxes affect the income of funds
already acquired, I observe, that this income proceeds from moveable or
immoveable property. The first of which will constantly avoid the grasp
of every statesman who attempts to lay a tax upon it. Cumulative taxes,
therefore, if carried to their utmost extent, may absorb the whole
income of _immoveable property_; but of that only.

Proportional taxes, again, have been said to affect the superfluity of
those who consume the objects of them; consequently, if every thing
which is consumed were first to suffer an alienation for money, a
proportional tax might be imposed upon it.

The method, therefore, of carrying proportional taxes to their utmost
extent, is, to draw to market every thing consumable; and insensibly to
raise the tax upon it, so high as to absorb, as much as possible, the
whole superfluity of the consumers.

Taxes being carried to that height, the state will become proprietors of
the whole income of the immoveable funds, and the industrious classes
alone will augment their wealth, in proportion to their frugality.

From this general principle it appears, that for the establishment of
proportional taxes, consumption is requisite, together with alienation;
consequently, where alienation takes place without consumption, as in
the sale of lands, and other immoveable subjects, a proportional tax
cannot be, properly, imposed. And also where consumption takes place
without alienation, as when the fruits of the earth are consumed by
those who raise them, proportional taxes cannot, with any propriety, be
levied. Farther,

As taxes do not bear a proportion to effects, but to circulation, it
follows, that they can only be raised, properly, upon alienation by
sale. Many examples however may be found of proportional taxes, imposed
in different countries, where neither sale or even alienation takes
place. These I observe to be the worst kind of proportional taxes, and
the most oppressive to those who pay them.

From the principle that taxes are in proportion to circulation, and not
in proportion to consumption, we discover the reason why of old they
were so difficult to be raised. Consumption then went on as now, in many
respects, in proportion to the number of inhabitants; but circulation,
that is, alienation by sale, bore no proportion to it.

The effect of every increase in circulation is to swell the amount of
taxes; and when they are extensively imposed in a country of industry,
the whole currency is thereby made to flow through the coffers of the
public, as the blood of the human body flows through the heart, and is
by that diffused through every member.

CHAP. IX. I next examine the consequences of a total abolition of taxes,
the better to discover the effects which such an alteration would
produce, first, upon the prosperity of the whole community; and next,
upon that of the principal classes of inhabitants, which compose it.
These I reduce to three.

1_mo_, Those who administer government, and who are maintained from the
amount of taxes.

An abolition of them, with respect to this numerous class, would draw
consequences along with it, directly destructive to their interest; and,
consequently, prejudicial to that of all the industrious classes who
supply their consumption.

2_do_, With respect to the second class, which I suppose to be composed
of the industrious part of the people, I observe, that an abolition of
taxes must proportionally imply a diminution of circulation; this would
produce a proportional diminution upon alienation; consequently, would
interrupt the industry of many, and thereby throw them into a hurtful
competition among themselves for subsistence. And as it has been proved,
that the industrious classes pay no taxes, as matters stand, providing
they be diligent and frugal, they consequently would _gain_ nothing, and
must _lose_ a great deal by the abolition of them.

3_tio_, In the third class I comprehend those whom we have hitherto
considered as the opulent and idle consumers. Of this category the
proprietors of land form a considerable branch. They, we have said, draw
back no part, either of the cumulative or proportional taxes, which
affect them; but although they be deprived of that immediate
indemnification, competent to the industrious, they reap, in another
way, advantages which more than compensate all the burden laid upon
them. These proceed from the consequences of that spirit of industry
which is diffused over the whole people; in consequence of which, their
lands are improved, the produce of them is readily disposed of, and what
proves superfluous for domestic consumption meets with a ready market
abroad, and thereby supports the value of all productions within the
country.

It may be asked, then, where the burden of taxes falls, since every
class of inhabitants seems to gain some advantage by them?

I answer, that they imply no burden when rightly imposed. The
augmentation of industry, in consequence of the increase of circulation,
provides a fund of well employed time, which, converted into money, is
more than sufficient to pay all the taxes not immediately affecting the
income of solid property; and the constant improvement of this, in
consequence of the former, is more than sufficient to indemnify the
land-proprietors.

Taxes, in this light, resemble the expence laid out upon new
establishments for improvement; because in their consequences they
augment the prosperity and ease of the whole people, not by being
levied, but by being properly applied, as is farther explained in the
next chapter.

CHAP. X. Here I examine whether taxes be a spur to industry, as some
pretend.

The doubt concerning this point has arisen from what daily experience
has shewn, that nations become industrious in proportion to the taxes
they pay. It is not very evident, that the _payment_ of a tax by any
person should enable him to discharge it with more facility, unless it
be from the profit he reaps in drawing it back from others, with an
additional profit to himself. But it is palpable that the amount of
taxes being properly _expended_ by a state, will increase circulation,
and give fresh encouragements to industry of every kind.

I close this chapter with a short representation of the nature of
ancient and modern circulation, accompanied with observations upon their
respective effects in rendring mankind industrious.

CHAP. XI. Of all cumulative taxes, that laid upon land-property produces
the greatest amount, with the least oppression to the contributors. This
leads me into a particular inquiry into the nature of the land-tax, as
it is established in Great Britain, and in France.

To render a land-tax equal and easily born, the imposition ought to be
preceeded by a fair valuation of every article of revenue intended to be
taxed, and no other income but that proceeding from an immoveable fund
of property, ought to be affected by it. From this I am led to
disapprove of the method of assessment established in England by the
land-tax; and also of blending a tax upon solid property, with an equal
imposition upon personal estates, which we have shewn to be of a nature
incompatible with cumulative taxation.

The defects of this kind of imposition in France (where it is called the
_taille_) are different. There the rents of lands, which are the proper
object of every land-tax, are frequently withdrawn from under the
influence of it, in consequence of the privileges enjoyed by the higher
classes, which are exempted from the _taille_. The consequence is, that
the French land-tax falls upon that part of the lower classes who are
employed in the cultivation of the soil. From this proceeds a double
inconvenience.

If those who cultivate are proprietors, their portions are, commonly,
very small, and a land-tax which would be light to a considerable
proprietor, is quite intolerable to those who draw little more from
their portion than what is necessary for their own subsistence. If those
who cultivate are lessees to the more considerable proprietors, the
burden falls upon them independently of the land-rent, which ought
naturally to bear it.

As a proof that this is a true representation of the matter, I review
the Marechal de Vauban’s scheme for new modelling the system of French
taxation: and from the intolerable oppression which would follow the
execution of it, we may judge of the present state of taxes in a nation
where that scheme was intended as a considerable alleviation of their
burden.

Nothing but the establishment of industry and extensive credit, with a
substitution of proportional taxes, instead of the many cumulative ones,
imposed on the lower classes in France, can ever produce a facility in
paying the considerable impositions laid upon that nation.

CHAP. XII. The most proper method of imposing a land-tax is, without
doubt, to confine the imposition to the rent of lands only, and to lay
it on in proportion to them. But how is it to be expected that ever such
a plan can take place in a nation where the proprietors of land govern
the state? In France, the power of the King has never been able to
establish a tax upon the rent of lands, for any longer duration than
that of a foreign war. In a neighbouring nation, it has now been
established for the greatest part of a century. Were it there to become
perpetual, it might be converted into a new domain, or it might prove a
fund for discharging, at once, a very great part of the national debt.

When taxes are imposed, it is of great consequence to establish a right
administration of them. The easiest method for a state, is to give them
in farm; and this was the general practice every where, on the first
establishment of taxes. But here no general rule can be laid down.

Cumulative taxes are better administred by commissioners, than let out
in farm. The operation of levying them is simple; but when they are
farmed, the lower classes of the people are apt to be oppressed. When
farms are properly established, an open management of them is absolutely
requisite: from this new improvements naturally arise, which give to the
farm almost every advantage of the management by commissioners. This
improvement is, to divide the profits upon the farm between the state
and the farmers: a plan put in execution in France not many years ago.

No question whatever appears more difficult to resolve, than that of
ascertaining the fund out of which taxes ought to be paid. Through the
whole course of this inquiry, I have endeavoured to shew, that the real
fund of taxes is the money circulating among the inhabitants, either in
consequence of sale, or of payments. In order to expose this question in
a new light, I have commented upon two passages of Davenant, where he
estimates this fund from the quantity of national consumption.

From this he is led to compute the yearly taxable expence of every man
in England at 8_l._ sterling; when perhaps the circulation of money
through the hands of many may not be twenty shillings: whereas,
according to my theory, it is these twenty shillings only that can be
laid under any taxation whatever.

I thought this method of comparing the result of Davenant’s reasoning
with mine, might better serve to support the latter than any other I
could contrive.

The last question proposed in this chapter is no more than a hint to
shew, that a proportional tax, laid upon meat and drink, is the most
proper equivalent for a land-tax; because those who purchase their
subsistence with money are, according to the principles of the first
book, those who consume that part of the fruits of the earth which is
equivalent to the land rent. If this be arbitrarily laid under an
imposition, by a pound rate, or otherwise, the proper drawback, if any
be allowed, should be from a tax laid upon those who consume that part
of the earth’s produce which belongs to the landlords.

I have now concluded this inquiry, according to the plan I at first
proposed. It is the fruit of eighteen years close, though agreeable
application; interrupted only by many intervals of bad health, and many
strokes of adverse fortune.

It never was, till lately, my intention to offer to the public, during
my life, what I had composed purely for my own instruction and
amusement. But upon comparing my sentiments in several points with those
of the generality of my friends, they have been found so widely
different, that I was thought in duty bound to my country, to submit
them to the criticism of the public.

To this I have the more willingly submitted, as I thereby shall pursue
my first intention in taking my pen; which was, to clear up my ideas on
this subject. And since I can now draw no farther knowledge from my own
inquiries, I must expect it from the criticisms of those who may think
it worth their while to animadvert upon my notions.

                                 FINIS.

                           A TABLE OF COINS,

         Shewing the Quantity of Fine Metal contained in them.

 The number of grains of fine metal in every coin is sought for in the
   regulations of the mint of the country where it is coined, and is
  expressed in the grains in use in that mint: from that weight it is
  converted into those of other countries, according to the following
                              proportions:

 3840 Troy-grains, 4676.35 Paris-grains, 5192.8 Holland-aces or grains,
 and 4649.06 Colonia-grains, are supposed to be equal weights; and the
    coins in the table are converted according to those proportions.

    Table of Coins, reduced to Grains of fine Metal, according to the Troy, Paris, Colonia,
                                      and Holland-weights.

 ───────────────────────┬─────────────────────────────────┬─────────────────────────────────
                        │           Gold Coins            │          Silver Coins.
 ───────────────────────┼───────┬───────┬────────┬────────┼───────┬───────┬────────┬────────
                        │Troy.  │Paris. │Colonia.│Holland.│Troy.  │Paris. │Colonia.│Holland.
 ───────────────────────┴───────┴───────┴────────┴────────┴───────┴───────┴────────┴────────
    English Coins.
 ───────────────────────┬───────┬───────┬────────┬────────┬───────┬───────┬────────┬────────
  1 A Guinea by statute │118.651│ 144.46│ 143.65 │160.45  │       │       │        │
  2 A Crown by statute  │       │       │        │        │ 429.68│ 523.2 │ 520.2  │ 581.
  3 A Shilling by       │       │       │        │        │ 85.935│ 104.65│ 104.   │ 116.2
      statute           │       │       │        │        │       │       │        │
  4 A Silver Pound      │       │       │        │        │1718.7 │2093.  │2080.8  │2324.1
      sterling by       │       │       │        │        │       │       │        │
      statute 1601      │       │       │        │        │       │       │        │
  5 A Gold Pound        │ 113.  │ 137.61│ 136.8  │152.8   │       │       │        │
      sterling by       │       │       │        │        │       │       │        │
      statute 1728      │       │       │        │        │       │       │        │
  6 A Silver Pound      │       │       │        │        │1639.38│1996.4 │1984.7  │2216.
      sterling in       │       │       │        │        │       │       │        │
      currency = 20⁄65  │       │       │        │        │       │       │        │
      lib. troy         │       │       │        │        │       │       │        │
  7 A Silver Pound      │ 113.  │ 137.61│ 136.8  │152.8   │1638.5 │1995.3 │1983.7  │2215.7
      sterl. at the     │       │       │        │        │       │       │        │
      proportion of gold│       │       │        │        │       │       │        │
      to silver as 1 to │       │       │        │        │       │       │        │
      14½               │       │       │        │        │       │       │        │
  8 A Gold Pound        │ 118.4 │ 144.18│ 143.34 │160.11  │1718.7 │2093.  │2080.8  │2324.1
      sterling at the   │       │       │        │        │       │       │        │
      same proportion of│       │       │        │        │       │       │        │
      1 to 14½          │       │       │        │        │       │       │        │
  9 A Pound sterling at │ 115.769│ 140.98│140.16  │156.55  │1678.6 │2041.2 │2032.2  │2269.9
      the mean          │       │       │        │        │       │       │        │
      proportion in gold│       │       │        │        │       │       │        │
      and in silver     │       │       │        │        │       │       │        │
 10 A Shilling current =│       │       │        │        │ 81.961│  97.8 │  99.   │ 110.82
      1⁄65 of a pound   │       │       │        │        │       │       │        │
      troy              │       │       │        │        │       │       │        │
 11 A Guinea in silver, │       │       │        │        │1804.6 │2197.6 │2184.8  │2440.3
      or 21 shillings   │       │       │        │        │       │       │        │
      standard weight   │       │       │        │        │       │       │        │
 12 A Guinea at the     │       │       │        │        │1720.4 │2095.1 │2082.8  │2326.4
      proportion of 1 to│       │       │        │        │       │       │        │
      14½, worth in     │       │       │        │        │       │       │        │
      silver            │       │       │        │        │       │       │        │
 13 A Pound troy, or 12 │5760.  │7019.2 │6973.5  │7789.2  │       │       │        │
      ounces English    │       │       │        │        │       │       │        │
      weight            │       │       │        │        │       │       │        │
 ───────────────────────┴───────┴───────┴────────┴────────┴───────┴───────┴────────┴────────
    French Coins.
 ───────────────────────┬───────┬───────┬────────┬────────┬───────┬───────┬────────┬────────
  1 A Louis d’or        │ 113.27│ 137.94│ 137.13 │ 153.17 │       │       │        │
  2 A Crown of six      │       │       │        │        │ 409.94│ 499.22│ 496.3  │ 554.3
      livres            │       │       │        │        │       │       │        │
  3 A Crown of three    │       │       │        │        │ 204.97│ 249.61│ 248.15 │ 277.1
      ditto             │       │       │        │        │       │       │        │
  4 A Livre             │       │       │        │        │  68.34│  83.23│  82.74 │  92.42
  5 A Louis d’or, or 24 │       │       │        │        │1639.7 │1996.9 │1985.2  │2217.4
      livres in silver  │       │       │        │        │       │       │        │
  6 A Marc of Paris     │3783.87│4608.  │4581.1  │5116.9  │3783.87│4608.  │4581.1  │5116.9
      weight, fine gold │       │       │        │        │       │       │        │
      or silver         │       │       │        │        │       │       │        │
  7 A Marc of gold coin │3398.3 │4138.5 │4114.3  │4593.4  │       │       │        │
      effective weight, │       │       │        │        │       │       │        │
      in fine           │       │       │        │        │       │       │        │
  8 A Marc of silver    │       │       │        │        │3402.3 │4143.4 │4119.2  │4600.9
      coin effective    │       │       │        │        │       │       │        │
      weight, in fine   │       │       │        │        │       │       │        │
 ───────────────────────┴───────┴───────┴────────┴────────┴───────┴───────┴────────┴────────
    German Coins.
 ───────────────────────┬───────┬───────┬────────┬────────┬───────┬───────┬────────┬────────
  1 A Carolin legal     │ 115.45│ 140.6 │ 139.78 │ 156.12 │       │       │        │
      weight            │       │       │        │        │       │       │        │
  2 A Ducat of the      │  52.8 │  64.37│ 64.    │  71.48 │       │       │        │
      Empire ditto      │       │       │        │        │       │       │        │
  3 A Florin of         │       │       │        │        │ 179.73│ 218.87│ 217.6  │ 243.
      Convention        │       │       │        │        │       │       │        │
  4 A Dollar of         │       │       │        │        │ 269.59│ 328.31│ 326.4  │ 364.5
      Convention        │       │       │        │        │       │       │        │
  5 A Dollar of         │  17.85│  21.74│ 21.615 │24.14   │       │       │        │
      Exchange, the     │       │       │        │        │       │       │        │
      Carolin = 9 flor. │       │       │        │        │       │       │        │
      42 kreutzers      │       │       │        │        │       │       │        │
  6 A Florin current =  │  10.54│  12.84│  12.77 │14.26   │       │       │        │
      1⁄11 of a Carolin │       │       │        │        │       │       │        │
  7 A Carolin in silver │       │       │        │        │1674.  │2038.6 │2026.8  │2263.8
      at the proportion │       │       │        │        │       │       │        │
      of 1 to 14½       │       │       │        │        │       │       │        │
 ───────────────────────┴───────┴───────┴────────┴────────┴───────┴───────┴────────┴────────
    Dutch Coins.
 ───────────────────────┬───────┬───────┬────────┬────────┬───────┬───────┬────────┬────────
  1 A Dutch Ducat       │  51.76│  63.  │  62.67 │  70.   │       │       │        │
  2 A Florin in silver  │       │       │        │        │ 148.  │ 180.3 │ 179.2  │ 200.21
 ───────────────────────┴───────┴───────┴────────┴────────┴───────┴───────┴────────┴────────

 [The Binder is desired to place this TABLE before the Index in Vol. II.
             and not to cut off the Margin, but to fold it.]

------------------------------------------------------------------------

                                 INDEX.

    N. B. For the analysis of the subject, see the Table of Contents
                        prefixed to each volume.

                                   A.

 _Agriculture_, the most essential requisite for population, Vol. I. p.
    21. 25.
   The extension of, how to be regulated, _id._ 28.
   When it may be said to be carried to its utmost extent, _id._ 82.
   The difference between, when exercised as a trade, and when as the
      direct means of subsistence, _id._ 88.
   Remarks on the state of, in Spain, _id._ 89.
   In Germany, _id.._ 91.
   In England and France, _id._ 102.
   In Scotland, _id._ 103.
   Whether the efficient cause of the multiplication of mankind, or
      their multiplication of agriculture, id. 114.
   What species of, most advantageous to modern society, _id._ 127.
   The natural distribution of, _id._ 139.

 _Agio of the bank of Amsterdam_, explained, II. 296.

 _Aides in the French taxes_, explained, II. 502. _n._

 _America_, the alterations in the modes of government in Europe,
    occasioned by the discovery of, I. 10. 51.

 _Amsterdam_, remarks relative to the bank of, II. 56.
   Original intention of the bank there, _id._ 292.
   Principles of circulation through it, _id._ 298.
   Its credit compared with the bank of England, _id._ 308.
   Dangers to which it is liable, _id._ _ib._

 _Animal food_, detrimental to population, I. 117.

 _Animals_, their numbers in all countries proportioned to the quantity
    of food produced for them, I. 18.
   This proposition illustrated in mankind, _id._ 19. 113.

 _Anne_, Queen, state of the revenue of England at her accession, II.
    381.

 _Antients_, their simplicity of manners, how compatible with a great
    multiplication, I. 152.

 _Arbitrary power_, its influence on trade, I. 244.

 _Army_, regular, the necessity of, in an industrious state, argued, I.
    136.

 _Army_, how to raise a supply of men for, without having recourse to
    the hiring foreign troops, I. 450.

 _Athenians_, Xenophon’s plan for the proper employment of, I. 460.

 _Athens_, surprizing quick reduction of its wealth, I. 438.

                                   B.

 _Balance between nations_, the nature of, in a commercial view,
    explained, II. 334.
   Hints for the payment of, without the intervention of coin or
      bullion, _id._ 344.

 _Balance of power_, the nature of, inquired into, I. 448.

 _Balance of trade_, what, II. 21.
   Reflections relating to, I. 416.
   Whether any judgment can be formed concerning it, barely from the
      quantity of specie found in a nation, I. 429.
   Whether the state of specie furnishes any rule to judge of it, _id._
      435.
   A wrong one raises the price of bullion to the value of coin, II. 5.
   Between England and France, the state of, how to be discovered, _id._
      18.
   How the payment of a wrong one affects circulation, _id._ 169.

 _Bank_, whether landed men might not as well issue their own notes on
    their landed security, as apply there, II. 131.

 _Banks_, the two general classes of, II. 146.
   Of circulation, what, _id._ 150.
   How a good one may be obliged to stop payment, _id._ 152.
   On what the solidity of it depends, _id._ 153.
   On what kind of credit such banks ought to issue their notes, _id._
      _ib._
   How their obligation to pay in coin arose, and the consequences of
      that obligation, _id._ 157.
   How affected by a wrong balance of trade, _id._ 161.
   How a grand balance may be paid by, without the assistance of coin,
      _id._ 162.
   How hurt by leaving the payment of a wrong balance to exchangers,
      _id._ 165.
   Upon what principles they ought to borrow abroad, and give credit at
      home, _id._ 178.
   Of Edinburgh, hints for the advantage of, _id._ 187.
   How they may be enabled to discharge notes on demand, _id._ 200, 213.
   Subaltern, and their competition with each other, II. 202.
   National, necessary regulations for, proposed, II. 205.
   When, and in what case, they shall be obliged to keep open books,
      _id._ 208.
   Whether it is their interest to grant credit and cash accounts to
      exchangers and others, and to make a trade of sending the coin out
      of the country, _id._ 211.
   How by the return of a favourable balance, the debts of foreigners
      may be paid off, and the nation delivered from that burden, _id._
      218.
   Dangerous to an idle nation, _id._ 232.
   Of the first establishment of that of Mr. Law, _id._ 235.
   The Royal Missisippi, _id._ 243.

 _Bank of Amsterdam_, original intention of, II. 292.
   The principle of its circulation of coin explained, _id._ 298.

 _Bank of England_, the interest of, examined, I. 629.
   State of, II. 158.
   Its situation in the year 1745, _id._ 176.
   Its principal operations traced, _id._ 220.
   Its circulation with the exchequer explained, II. 225.
   Hints for the advantage of, proposed, _id._ 229.
   How the paper of, tends to supply circulation, _id._ 233.
   Its credit compared with that of the bank of Amsterdam, _id._ 308.

 _Banks of deposit and transfer_, II. 291.

 _Bank notes_, the nature of, explained, II. 151.
   Of the optional clauses contained in, _id._ 195.

 _Bankers and exchangers_, subaltern ones, the use of, II. 154.

 _Banking_, that branch of credit best deserving the attention of a
    statesman, II. 149.
   The nature of, in Scotland, _id._ 155.

 _Bankruptcies_, national, how occasioned, II. 456.
   The natural consequences of, traced, _id._ 457.
   As supposed to take place by a concerted act of power, _id._ 458.
   The supposition of a nation becoming bankrupt to itself inconsistent,
      _id._ 462.

 _Barter_, the first species of trade, I. 175.

 _Beer_, remarks on the late additional duty on, II. 512.

 _Belloni_, Mr. mistakes of, pointed out, with respect to estimating the
    exportation of commodities of a particular country, by the quantity
    of money found in it, I. 430.

 _Bills of mortality_, plan for the improvement of, I. 72.

 _Birmingham_, no silver coin counterfeited there, II. 99. _note._

 _Brakenridge_, Dr. his account of the state of population in Great
    Britain, I. 95.
   Remarks on, _id._ 97.

 _Bread_, the price of, how limited in the greatest famine, I. 397.

 _Britain, Great_, remarks on the state of population in, I. 95.
   By what means her credit is supported, II. 107.
   Short state of its present taxes, debts, and funds, _id._ 398.
   Compared with those of France, _id._ 438.

 _Bullion_, how the price of, is regulated, I. 564. II. 20.
   Why dearer in England than in France, _id._ 14.
   The advantages of this to France, _id._ _ib._ Brought to the mint,
      when trade is favourable, _id._ 35.
   The causes of its rise and fall in the English market explained, II.
      332.

 _Buyers and sellers_, the interest of, examined, I. 628.

                                   C.

 _Canada_, the principles of the European trade to, inquired into, I.
    186.

 _Cantillon_, Mr. his remark on the course of exchange between London
    and Paris, II. 17.

 _Capet_, Hugh, the nature of his jurisdiction compared with that of a
    king of Poland, I. 240.

 _Charity_, modern, shewn to be impolitic, I. 467.

 _Child_, remarks on that position of his, that the legislature can keep
    down the rate of interest to the level most advantageous for trade,
    II. 122.

 _Circulation_, in a political sense, explained, I. 374.
   Illustrated by a party at quadrille, _id._ 375.
   How to be excited, _id._ 378.
   Illustrated, _id._ 381.
   When it should be checked, _id._ 384.
   Foreign and domestic, to be distinguished, _id._ 389.
   How affected by the payment of a wrong balance of trade, II. 170.
   Comparative inquiry into the state of, among the ancients and
      moderns, II. 558.

 _Cities_, the growth of, accounted for, I. 48.
   Described as under a feudal government, _id._ 51.
   In what respects advantageous to a country, _id._ 55.
   See _Corporations_.

 _Classes of mankind_, the advantages of calculations and bills of
    mortality distinguishing them, I. 72.

 _Coin_, new regulations for, proposed, I. 634.
   The term defined, II. 46.
   What the best form to be given to it, _id._ 67.
   Difference between, and medals, _id._ 67.
   Gold, silver, and copper, remarks on, _id._ 68.
   Never found to exceed the uses of circulation, _id._ 112.
   How the obligation of banks to pay in, arose, and the consequences of
      that obligation, _id._ 157.
   French, account of its variation about the time of the death of Louis
      XIV. _id._ 236.
   See _Money_.

 Coinage, duty on, II. 2.
   Its first introduction must reduce the prices of commodities, _id._
      3.
   Consequences of the exclusive privilege of, _id._ 4.
   The price of, in France, _id._ 17.
   How the paying for, affects the profits on goods exported, _id._ 26.
   How it affects the profits on goods imported, _id._ 28.
   How it influences the prices of inland commodities, II. 33.
   Experiment in, proposed, _id._ 39.
   How the imposition of, will affect the creditors of Great Britain,
      _id._ 53.
   How it advances the credit of France, _id._ 54.
   Whether the imposition of, in England, would not frequently stop the
      mint, _id._ 57.
   When adviseable to impose a duty on, _id._ 29.
   How imposed, _id._ 30.
   By authority, _id._ 31.
   By consent, _id._ ib.
   The consequences, _id._ _ib._ _id._ 34.

 _Colbert_, Mr. remarks on, I. 67.

 _Commerce_, an examination of the various principles by which it is
    regulated, I. 191.

 _Commodities_, in trade, what considerations enter into the fixing
    prices on them, I. 182.
   Consumable, distinguished from permanent property, _id._ 361.
   By what the prices of them are regulated, _id._ 528.

 _Companies_, mercantile, an inquiry into the advantages and
    disadvantages of, I. 471.

 _Competition_, its effect on trade, I. 196.
   Three questions relative to, _id._ 200.
   Among nations, its operation, _id._ 232.
   Among workmen, the nature of, examined, _id._ 317.

 _Conquerors_, why the government of, heavy to be borne, I. 10.

 _Consumers and producers_, their relation to each other, and the
    political balance between, considered, I. 264.

 _Consumption of productions of the earth_, the question whether a
    frugal or prodigal one, be for the advantage of population, argued,
    I. 141.

 _Corn_, difference between the price of it being lowered by plenty, and
    by importation, I. 292.
   Expedient proposed to assist a people during a scarcity of, _id._
      294.

 _Corn trade_, general reflexions on, I. 214.
   On exportation and importation of, _id._ 230.

 _Corporations_, reflexions on, I. 331.
   Whether checks upon industry, _id._ 332.
   Regulations of German ones, _id._ 333.

 _Corsicans_, the real state of their contest with Genoa, I. 419.

 _Corvée_, in the French revenue, what, II. 485. _n._

 _Country_, the love of, in individuals, how to be understood, I. 164.

 _Courage_, where likely and where unlikely to be found, I. 452.

 _Credit_, a definition of, II. 105.
   Why seldom found perfectly solid, under a pure monarchy, _id._ 106.
   Why that of France is so fluctuating, _id._ 106.
   Why that of Great Britain so well established, _id._ 107.
   Not yet fixed upon true principles, _id._ 130.
   The various kinds of, _id._ 141.
   Their characteristic differences, _id._ 143.
   The nature of, examined into, I. 365.
   Its commercial advantages, _id._ 366.
   Public, how the internal balance of wealth is affected by it, _id._
      370.

 _Credit_, public, brief sketch of the birth and progress of, I. 208.
   The utmost extent of, how to be determined, II. 463.
   The rise and fall of, explained, _id._ 351.
   Of anticipations, or borrowing money upon assignments of taxes, for
      the discharge of principal and interest, _id._ 354.
   Of France, state of, before the death of Louis XIV. _id._ 367.
   A comparison between that of France and England, in the times of
      Richlieu and Davenant, _id._ 377.
   Of Great Britain, the present state of, _id._ 380.

 _Credit_, private, the subdivisions of, II. 144.
   How to carry, to its greatest extent, _id._ 145.

 _Credit_, debts and taxes, consequences of the change produced in the
    policy of industrious trading states, by the establishment of, II.
    441.

 _Creditors_, the interest of, always the predominant, and what
    determines the interest of a nation, I. 611.
   Public, the interest of, examined, _id._ 625.

 _Cumulative tax_, the term defined, II. 500.
   See _Tax_.

 _Crop_, plentiful, of Grain in England, inquiry what proportion it
    bears to the annual consumption, I. 109.
   Difference between a reputed good and bad one, _id._ 112.

                                   D.

 _Davenant_, Dr. his correction of Sir William Petty’s computations, I.
    42.
   His scheme for land and poll taxes to raise the government supplies,
      inquiry into the expediency of, II. 362.
   His reasons for recommending the farming of taxes, _id._ 581.

 _Debts_, public, the various consequences of, II. 348.
   The methods of contracting and paying off, _id._ 465.
   The two classes of, _id._ 473.
   The consequence which would result from an immediate discharge of
      them, _id._ 474.
   Of England, at the peace of Ryswick, what, _id._ 360.
   Progress of, traced, _id._ 381.

 _Demand_, a definition of that word, in a commercial view, I. 172.
   High, and great, distinguished, _id._ 188.
   Distinguished from competition, _id._ 197, 487.
   The different acceptations of that word enumerated, _id._ 484.

 _Demand_ and work, an inquiry into the causes which influence an
    alteration of the balance between, I. 217.
   The duty of a statesman to assist and permit gentle vibrations
      between, id. 229.

 _Democracy_, how it differs from monarchy, I. 242.
   How they affect trade respectively, _id._ 243.

 _Dependance_, in society, three kinds of, distinguished, I. 238.
   On courts, the principles on which it subsists, analized, _id._ 357.

 _Depopulation_, the most effectual causes of, I. 108.

 _Desertion_, among soldiers, the cause of, pointed out, I. 136.

 _Diseases_, political, certain sign of, I. 69.

 _Dissipation_, the benefits of, to industry, I. 367.

 _Ducats_, examination of the new regulation of, in Holland, I. 612.

 _Dutot_, M. his sentiments on paper credit with reference to the
    affairs of France, II. 241, 245.

                                   E.

 _Edinburgh_, hints for the improvement of the banks there, II. 187.

 _England_, the idleness and luxury of manufacturers, of more prejudice
    to its foreign trade, than the high taxes, II. 504.

 _England or France_, which the most populous, I. 102.

 _Equality of possessions in a state_, the consequences of, examined
    into, I. 367.

 _Estate_, the difference between one near the metropolis, and one in a
    remote province, I. 55.

 _Evil_, no such thing in the universe, I. 482. _n._

 _Europe_, the great revolution in the political system of, and the
    cause to which it is owing, I. 10.

 _Excess_, import of that term, I. 308.
   Distinguished from sensuality and luxury, _id._ 311.

 _Exchange_, the best measure for valuing currency, I. 570.
   How the course of it is regulated, II. 13, 21.
   Whether the loss which the course of it marks on the trade of Great
      Britain with France, be real or apparent, _id._ 25.
   The first principles of, _id._ 310.
   The difficulties which occur in paying balances, _id._ 315.
   How these payments are effected, _id._ 332.
   The operations of, between London and Paris, _id._ 335.

 _Exchequer_, its circulation with the bank, explained, II. 225.

 _Excise_, the accounts of, how settled between the exchequer and the
    bank, II. 226.
   When it first took place, _id._ 362.
   Its effects at that time, _id._ _ib._ In what the oppression of
      levying consists, _id._ 511.
   Defect of, and the ill effects arising, _id._ 512.
   Hints for remedying, _id._ 515.

 _Expence_, the word defined, and the senses in which it is used,
    distinguished, I. 205.

 _Exportation_, the proper means of encouraging, I. 283.
   Reflections on premiums for, _id._ 297.
   What the most profitable branches of, _id._ 341.
   The proper conduct when that of a nation is reduced to the articles
      of natural produce, _id._ 343.
   Why those manufacturers who work for, the poorest of those in a
      state, II. 10.
   Theory of the prices on articles of, _id._ 11.

                                   F.

 _Fall of man_, consequences of, shewn, I. 455. _n._
   Conclusions drawn, on the supposition that it had not taken place,
      _id._ _ib._

 _Feudal system of government_, how departed from in the present forms,
    I. 10.
   Why taxes so little found under, _id._ 501.
   Subordination of the different ranks under, how founded, _id._ 240.
   Its influence on trade, _id._ 245.

 _Feudal governments_, three remarkable stages, through which they have
    changed to the present forms, I. 356.

 _Fisheries_, hints for the proper establishment of, I. 480.

 _Fleuri_, Cardinal, his experiment to fix the par of exchange, II. 340.

 _Foreign ministers_, political hint, as to their accommodations in the
    countries where they are sent to reside, I. 420.

 _Forestalling_, why a crime, I. 200.

 _Forests_, whether extended by an increase in the consumption of
    firewood, I. 145.

 _Foundling_ hospitals recommended, I. 75.

 _Foundlings_, opportunity for providing for, pointed out, I. 287.

 _Fourage_, in the French taxes, what, II. 496. _n._

 _France_, reflections on the state of agriculture in, I. 141.
   The progress of luxury in, compatible with the prosperity of her
      foreign trade, _ib._ 288.
   The principle on which the raising and sinking of the numerary value
      of the coin there in former times is accounted for, _ib._ 612.
   The policy of, with regard to its coin, why not easily understood,
      II. 32.
   Remarks on the currency of its coin, _id._ 58.
   Regulations of, with regard to coin, bullion, and plate, _id._ 70.
   Price of coinage there upon silver, _id._ 71.
   Ditto upon gold, _id._ 72.
   Proportion between a French grain weight to a grain troy, _id._ 73.
   Proportion between the louis and the guinea, _id._ 74.
   Advantages of the French regulations, _id._ 75.
   High price of bullion at Paris in 1760, _id._ 76.
   Present state of the wearing of the French silver coin, _id._ 77.
   Fluctuations of credit in, _id._ 106.
   Chronological anecdotes of banking there, _id._ 250.
   How its credit was destroyed in 1720, _id._ 284.
   How a bank may even now be safely established there, _id._ 289.
   State of their debts, funds, and appropriations, at the peace of
      1763, _id._ 403.
   Extent of annual supplies of, from 1756 to 1762, _id._ 420.
   Courts of justice in, how rendered oppressive, _id._ 432.
   Method of levying the taxes in, _id._ 437.
   The nature of the taxes imposed there, explained, _id._ 496, 501.

 _France and England_, which the most populous, I. 102.

 _Free_ gifts in France, as imposed in 1759, II. 419. _n._

 _Freedom_ of a people, in what it consists, I. 237.

 _Frugality_, the proper means of preventing the ill effects of, when it
    takes place in a luxurious state, I. 281.

 _Fund_, sinking, the first foundation of, II. 385.

                                   G.

 _Gabelle_, in the French taxes, explained, II. 501, _n._

 _Gardens_, kitchen, why most frequently found in the neighbourhood of
    cities, I. 139.

 _Gee_, Mr. remarks on his observations on the balance of the English
    trade, I. 431.

 _Germany_, Remarks on the state of agriculture in, I. 91.

 _Governing_, in what the art of, consists, I. 12.

 _Government_, the republican form of, most favourable to trade and
    industry, I. 242.

 _Grain_, inquiry into what proportion a plentiful crop of, in England,
    bears to the current annual consumption, I. 109.
   Inquiry into the difference between a plentiful year and a year of
      scarcity, _id._ 113.
   The price of, regulated by the abilities of the lowest class of
      people to purchase it, _id._ 401.
   The good effects which would result from preserving the price at some
      uniform standard, II. 509.

 _Greece_, antient, remark on the disproportion between the prices of
    necessaries, and elegances in, I. 403.
   Accounted for, _id._ 439.
   Its treasures supposed equal to the mines of the new world, _id._
      437.

 _Guinea and louis_, proportion between, II. 74.

 _Guineas_, an examination into the consequences of bringing down their
    currency to twenty shillings, I. 583.

                                   H.

 _Harris_, examination of a passage in, concerning coin, I. 609.

 _Helots_, their cruel treatment under the Spartan government, I. 254.

 _Henry_ VII. wise regulation of, for the preservation of bullion, II.
    327.

 _Holland_, the principles of its constitution inquired into, I. 214.
   Regulations observed in, with regard to coin and bullion, II. 78.
   Regulations of the Dutch mint, _id._ 79.
   How they reckon their silver standard, _id._ _ib._
   Mint price of fine silver, _id._ 80.
   Price of coinage there, _id._ _ib._
   Of the Dutch gold coins, _id._ _ib._
   Mint price of fine Gold, _id._ 81.
   Price of coinage upon ducats, _id._ 82.
   The rider, _id._ _ib._
   Utility of not fixing the denomination of ducats, _id._ 83.
   How to find the proportion of the metals in the coin of Holland, and
      a wonderful phænomenon in the value of ducats, _id._ 84.
   Quantity of fine silver in a florin piece, _id._ 85.
   Quantity of fine gold in a florin of riders, _id._ _ib._
   Investigation of the proportion as to the ducat, _id._ _ib._
   Proportion between the mint weights of Holland, England, France, and
      Germany, _id._ 87.
   Defects of the silver currency of Holland, _id._ 91.
   Frauds of money-jobbers there, _id._ 94.
   Reason of the apparent scarcity of silver coin there, _id._ 96.
   The great multiplication of taxes there, _id._ 529.
 _Horses_, whether the keeping a superfluous number in large cities, a
    public disadvantage, I. 145.
 _Hume_, Mr. examination of his doctrine concerning the influence of
    riches on the price of commodities, I. 398.
   Concerning the balance of trade, _id._ 416.

                                   J.

 _Jacob_ the patriarch, an idea of primitive society, borrowed from the
    history of him and his family, I. 23.
 _Janizaries, Turkish_, and the Pretorian cohorts of Rome, parallel
    between, I. 247.
 _Idle_ persons, the multiplication of, a load on society, I. 61.
 _Jews_, their law relating to interest, II. 112.
   The only money-lenders in Europe, until a commercial system
      prevailed, _id._ 113.
 _Imitation_, influence of the taste for, I. 280.
 _Indies_, account of the French company of, II. 247.
   Its revenue, _id._ 257.
 _Industrie_, in the French taxes, explained, II. 496. _n._
   Remarks on this tax, _id._ 498.
 _Industry_, an inquiry into the effects of, I. 133.
   a definition of, _id._ 166.
   Distinguished from labour, _id. ib._
   Why difficult to introduce in a country where slavery is established,
      _id._ 167.
   Whether the cause or the effect of trade, _id._ 170.
   How it is stimulated, _id._ 193.
   The difference between the progress of, in antient and modern times,
      accounted for, _id._ 193.
   Brief sketch of the progress and revolutions of, _id._ 207.
   A strong argument for a general exercise of, _id._ 210.
   The means of extending liberty to the lowest denominations of a
      people, _id._ 218.
   Flourishes best under a republican government, _id._ 242.
   Excluded by the system of Lycurgus, _id._ 258.
   The revolution it produces in the wealth of a nation, pointed out,
      _id._ 452.
   The proper direction of, hinted, _id._ 457.
   In what instance it destroys simplicity of manners, _id._ 459.
   Antient and modern, the difference of, shewn, I. 462.
   See _Industrie_.

 _Inhabitants_, an examination into that maxim which asserts the number
    of, to be the riches of a country or state, I. 60.

 _Innovations_, inconveniences attending, I. 632.

 _Interest_, private, the proper spring of action in the individuals of
    a well governed state, I. 164.

 _Interest of money_, how permitted under the Mosaic dispensation, II.
    112.
   When it obtained in Europe, _id._ 113.
   Upon what principles the rate of, is regulated, _id._ 115.
   No statute for regulating in England, before the time of Henry VIII.
      _id._ 116.
   Different classes of borrowers, _id._ 117.
   Extortions in, how prevented, _id._ 118.
   Whether in the power of the legislature to command the rate of, _id._
      122.
   The lowering of, the rise of land, _id._ 123.
   Proper conduct of a statesman in relation to, _id._ 124.
   Probable consequences of reducing it below the level of the stocks,
      _id._ 125.
   A low rate most essential to states carrying on the most extensive
      foreign commerce, _id._ 129.
   Whether the rate of, a sure barometer of the state of commerce, _id._
      135.
   Whether it falls in proportion to the increase of wealth, _id._ 139.
   How affected by the manners of a people, _id._ _ib._
 _Ireland_, the causes which influenced Great Britain to open her ports
    for the importation of provisions from, I. 231.
 _Island_, the progress of society illustrated, in a supposed one, I.
    128.

                                   K.

 _Kings_, their rights not founded on tacit contracts between them and
    their people, I. 240.
   In the old feudal systems, more formidable abroad than at home, _id._
      356.
   Compared with the domestic influence of those under the present
      commercial systems, _id._ _ib._

                                   L.

 _Labour_, the different obligations to, in antient and modern times, I.
    59.
   How the methods of, are to be improved, _id._ 193.
 _Land_, the disproportion between the rents of arable and pasture,
    accounted for, I. 43.
   What the general raising of rents of land may be supposed to
      indicate, _id._ 45.
   Considerations on the taxes on, II. 561.
   No regular valuation of, made, since doomsday book, _id._ 564.
   The tax on, how levied in England, _id._ 565.
   What the most proper method of imposing a tax on, _id._ 577.
 _Landed interest_, examination into, I. 622.
 _Landed men_, inquiry whether they might not issue their own notes on
    the security of their land, without the intervention of a bank, II.
    131.
 _Landed property_, the inconvenience of minute subdivisions of, I. 85.
   Inquiry into the expediency of the equal distribution of, _id._ 124.
 _Landholder and stockholder_, how comparatively affected by taxation,
    II. 448.
 _Land tax in Scotland_, defect in, II. 497.
 _Law_, Mr. account of the establishment of his bank, II. 235, 239.
 _Laws_, none really invariable, in any government, I. 7.
 _Levity_, remarks on the influence of, in luxury, I. 280.
 _Liberty_, public, in what it is understood to consist, I. 237.
   Capable of subsisting under despotic forms of government, _id._ _ib._
 _Liberty_, universal, established in Europe, and the consequences of,
    I. 70.
 _Linen manufacture_, by what means it has been augmented in Scotland
    and Ireland, I. 86.
 _Loans upon interest_, if deemed unlawful in a religious view,
    expedient to avoid, I. 370.
 _Locke_, Mr. mistake of, corrected, in relation to a proposed
    alteration of silver coinage, I. 554, 602.
 _Lotteries_, the advantage of, to the government, II. 400. _n._
   When only proper to be used for paying of public debts, _id._ 479.
 _Lowndes_, Mr. examination into the present propriety of his scheme for
    regulating the coin in 1695, I. 602.
 _Luxury_, the term defined, I. 31, 307.
   The parent of public distress, _ib._ 212.
   In what instance to be encouraged, _ib._ 263.
   This farther explained, _id._ 276.
   How to be effected, _id._ 277.
   Changes in the modes of, ever distressing to manufacturers, _id._
      280.
   Political improvement of this circumstance, _id._ _ib._
   The interests affected by, _id._ 307.
   The mind, _id._ 308.
   The body, _id._ 309.
   The fortune, _id._ _ib._
   The state, _id._ _ib._
   Its different effects on different antient nations, remarked, and
      accounted for, _id._ 324.
   Its effects in modern times, _id._ 325.
   Prejudicial to courage, _id._ 452.
   Modern, the cause of, hinted, _id._ 462.
   _Lycurgus_, the tendency of his laws to encourage population, shewn,
      I. 70.
   Why there was no industry in his republic, _id._ 193.
   His republic the most perfect plan of political œconomy, _id._ 250.
   His laws transmitted by tradition only, _id._ 251.
   The sanction he obtained for them, _id._ _ib._
   His regulation of property, _id._ 252.
   Cloathing, _id._ 253.
   The cruel treatment of the helots, _id._ 254.
   His plan of education, _id._ 255.
   Remarks on the austerity of his institutions, _id._ 256.
   His care to guard against the Spartans having an intercourse with
      foreign nations, _id._ 257.
   Conclusions drawn from a supposed adoption of his system by any
      modern nation, _id._ 259.

                                   M.

 _Machines_, the introduction of, into manufactures, whether hurtful or
    beneficial to a date, I. 119, 295.
 _Mankind_, in what respect alike in all ages, I. 6.
   The distribution of their residence in a country, how determined,
      _id._ 46.
   Their number in a free country, in the _ratio_ of their food, _id._
      113.
 _Manners of a people_, national peculiarities in, noticed, I. 8.
   The simplicity of, how it affects population, I. 36.
 _Manufactures_, the principles which determine the residence of, I. 49.
   Their flourishing or decaying in particular places, accounted for,
      _id._ 182.
   The proper method of lowering the prices of, to render them vendible
      at foreign markets, _id._ 283.
   Why particular ones cannot be furnished so cheap at home, as by other
      countries, _id._ 284.
   The importance of their being properly situated, _id._ 289.
 _Manufacturers_, why those who work for exportation are the poorest,
    II. 10.
   More hurt by their own idleness and extravagance than by taxes, _id._
      505.
 _Markets_, public, their great use in trade, I. 180.
 _Marriage_, political considerations on, I. 71.
 _Master_, his right to share in the profits of his journeymen, proved,
    I. 318.
 _Maxims_, general ones, the danger of adopting, I. 60.
 _Medals and coin_, the difference between, II. 68.
 _Megens_, Mr. his sentiments concerning the coin of the bank of
    England, II. 158.
 _Melon_, M. de, his remark on the proper qualifications of a statesman,
    I. 377.
 _Merchant_, observations on the profession of, I. 177.
 _Metal_, the term defined, II. 46.
   Why a scale of value realized in, can never be exact, _ib._ _id._ 54.
   How the proportion of those in coin, is kept nearly the same in all
      European markets, _id._ 62.
   Why this proportion so different between Europe and Asia, _id._ 63.
   How to determine the true intrinsic value of those in which a balance
      to foreign nations is to be paid, _id._ 316.
   How to remove the inconveniences which occur in such payments, _id._
      325.
 _Metropolis_, the growth of, accounted for, I. 48.
   A large one, whether disadvantageous to a country, _id._ 52.
 _Militia_, reflections on, I. 136.
 _Mind_, the effects of luxurious gratifications on, I. 308.
 _Minot_, a French measure, what, II. 576, _n._
 _Mint_, French unit of weight in, II. 70.
   Weights of Holland, England, France, and Germany, proportion among,
      _id._ 87.
 _Missisippi bank of France_, account of the establishment of, II. 243,
    252, 265.
   Inquiry into the motives for its plan, _id._ 256.
   Not intentionally a bubble, _id._ 263.
   How the failure might have been prevented, _id._ 276.
   How the credit of France was destroyed in May 1720, _id._ 284.
 _Modesty_, reflections on, with reference to the Spartans, I. 258.
 _Monarchy and democracy_, compared, I. 242.
   Their different influences on trade, _id._ 243.
 _Monasteries_, magnificent ones, how advantageous to a country, I. 468.
 _Money_, the term defined, I. 32.
   How to be procured, _id._ _ib._
   The plenty of, productive of luxury, _id._ 33.
   The effects of the introduction of, on trade, _id._ 176.
   Observations on that of Sparta, _id._ 259.
   An inquiry into the principles of the circulation of, _id._ 360.
   Real, and symbolical, what, _id._ 364.
   Illustrated, _id._ 381.
   Ready, caution necessary in taxing it, _id._ 387.
   No real and adequate proportion between, and goods, _id._ 394.
   In countries of simplicity, _id._ 395.
   In countries of industry, _id._ 397.
   Paper, whether advantageous to a nation, _id._ 408.
   Whether a tenfold increase of, in Europe, would raise the prices of
      commodities in the same proportion, _id._ 413.
   Whether any judgment can be formed concerning the balance of trade of
      a nation, barely from the quantity of specie that is found in it,
      _id._ 429.
   The dissipation of by individuals, not expedient to be checked, _id._
      471.
   Defined, _id._ 526.
   A scale for measuring the value of things, _id._ _ib._
   On what principles the value of things is determined, _id._ 527.
   The prices of things not regulated by the quantity of, _id._ _ib._
   Necessity of distinguishing between, and price, _id._ 529.
   Of account, what, and how contrived, _id._ _ib._
   Bank, _id._ 531.
   Angola, _id._ _ib._
   Usefulness of the precious metals in making, _id._ 532.
   Standard, how to be adjusted, _id._ 533.
   Debasing and raising a standard, what, _id._ 534.
   Alteration of the standard, how to be discovered, _id._ _ib._
   Of alloy, _id._ _ib._
   Incapacities of metals to constitute invariable measures of value,
      _id._ 535.
   The obligation of such measures to be invariable, _id._ _ib._
   Consequences of their variation, _id._ 536.
   Defects of a silver standard, _id._ 537.
   Arguments in favour of a silver standard, _id._ _ib._
   Answers to those arguments, _id._ 538.
   Usefulness of an universal measure, _id._ 539.
   Why metals incapacitated from performing the office of, _id._ 540.
   Wearing in circulation, _id._ _ib._
   Inaccuracy in coining, _id._ 541.
   Coinage adding to the value, without adding to the weight, _id._
      _ib._
   The smallest defects of, profited by in trade, _id._ _ib._
   Five remedies against the effects of the variation in the value of
      metals, _id._ 542.
   Remedies against other inconveniences, _id._ 544.
   Remedies against the wearing of coin, _id._ _ib._
   Remedies against inaccuracy in coinage, _id._ _ib._
   Remedies against the expence of coinage, _id._ _ib._
   Remedies against arbitrary changes in the value of coin, _id._ 545.
   How the market price of the metals is made to vary, _id._ _ib._
   The variation to be referred to the rising metal, not to the sinking,
      _id._ 546.
   Of account, how made to vary in its value, from the variation of the
      metals, and the consequences, _id._ 547.
   What the mean proportional between the value of the metals, _id._
      _ib._
   The unit to be attached to the mean proportion, upon a new coinage,
      not after the metals have varied, _id._ 548.
   The unit better to be affixed to one metal than to both, _id._ 549.
   To what variation the unit is exposed, from the wearing of the coin,
      _id._ _ib._
   To what variation the unit is exposed, from the inaccuracy in the
      fabrication of coin, _id._ 550.
   Variations to which the unit is exposed, from the imposition of
      coinage, _id._ 551.
   When coinage imposed, bullion cheaper than coin, _id._ _ib._
   Exception, _id._ 552.
   Variation to which the unit is exposed, from the arbitrary raising
      and debasing the coin by Princes, _id._ _ib._
   How this variation affects the interests of debtors and creditors,
      _id._ 553.
   A mistake of Mr. Locke in relation to, corrected, _id._ 555.
   Defects in the British coinage, _id._ 558.
   Of the standard of English coin and money unit, _id._ _ib._
   Coinage free in England, _id._ 559.
   The standard, when attached to the gold coin, _id._ 560.
   Consequences of that regulation, _id._ _ib._
   Silver, sometimes considered as a money of accompt, _id._ 561.
   Jobbers in, their practices explained, _id._ 562. 565.
   Why silver bullion is dearer than coin, _id._ _ib._
   What regulates the price of bullion, _id._ 564.
   The intrinsic value of the currency, _id._ _ib._
   Paper, the use of, not hurtful in debasing the standard, _id._ 571.
   The standard how shewn to have been debased, _id._ 574.
   Proof that the standard has been debased by law, _id._ 575.
   The standard at present reduced to the value of the gold, _id._ _ib._
   How the disorder in the coin may be remedied without inconveniences,
      _id._ 576.
   If the present standard be departed from, all other arbitrary, _id._
      577.
   The present standard not the same with that of Queen Elizabeth, _id._
      578.
   Anecdotes of its alterations, _id._ _ib._
   Debasing the standard, chiefly affects permanent contracts, _id._
      581.
   Why silver so scarce, _id._ 583.
   Consequences of fixing the guinea at twenty shillings, _id._ _ib._
   How to fix the pound sterling at the standard of Queen Elizabeth,
      _id._ 587.
   The consequences of this reformation, _id._ 588.
   Sufferers by the debasement of the standard, have a right to redress,
      _id._ 590.
   But not the whole class of creditors, _id._ _ib._
   Whose claim ought to be liable to conversion, _id._ 591.
   Objections against the principles before laid down, _id._ 593.
   Answers to them, _id._ 595.
   Upon whom the loss incurred by the wear of it, falls, _id._ 598.
   Inland dealings not able to support the standard where there are
      money-jobbers, or foreign commerce, _id._ 599.
   Public currency supports the authority of the coin, not the value of
      the pound sterling, _id._ 601.
   In what sense the standard debased by law, and in what sense by the
      operation of other political causes, _id._ 614.
   The payments made by bankers regulate all other, _id._ 615.
   Regulation proposed for the coin, _id._ 634.
   The first introduction of coinage must reduce the prices of
      commodities, II. 3.
   Why the doctrine of money appears so intricate, _id._ 45.
   The difference between raising the value of coin by imposing coinage,
      and raising the denomination of it, _id._ 50.
   Whether it is the interest of England to debase the standard of,
      _id._ 64.
   The borrowing of, for carrying on trade, more relative to the
      merchant than the manufacturer, _id._ 137.
 _Montesquieu_, Mr. examination of his doctrine concerning the influence
    of riches on the prices of commodities, I. 398.
 _Multiplication of people_, the three principles of, I. 90.
   Whether the efficient cause of agriculture, or agriculture of
      multiplication, _id._ 114.

                                   N.

 _Nation_, every interest in, intitled to protection, I. 589.
 _Nations_, trading, compared to a fleet of ships, I. 233.
 _Navigation_, remarks on the consequences of the act of, in England, I.
    343.
 _Naturalization of strangers_, ineffectual in the view of lowering the
    prices of manufactures, I. 290.
 _Necessaries_, an inquiry into the cause of a rise in the prices of, I.
    291.
   Physical and political, distinguished and explained, _id._ 312.
   The consumption of, how to be ascertained, _id._ 314.
   And superfluities, vague terms when different ranks of people are
      compared, _id._ 258.
 _Netherlands_, Austrian, the cities of, in a state of depopulation, and
    the reason, I. 334. _n._
 _Nobility_, the advantages of a numerous one, to a state, I. 63.
   Why their spirit ought to be preserved, _id._ _ib._
   Their behaviour in the field compared with that of traders, _id._ 64.
   Poor, reflexions on their situation, _id._ _ib._

                                   O.

 _Oeconomy_, general definition of, I. 1.
   Family and political, distinguished, _id._ 2.
   Political, when brought to perfection, _id._ 83.
 _Ounces_, different, a comparison of, II. 323. _n._

                                   P.

 _Padua_, observations on the soil and produce of the country round, I.
    140.
 _Paper money_, how realized, II. 110.
 _Paris_, remarks on the state of agriculture round, I. 139.
 _Partisans in France_, what, and cardinal Richlieu’s sentiments on
    their conduct, II. 369.
   Their extortions, why not then to be remedied, _id._ 370.
   The present regulation of them, _id._ _ib._
 _Pay of the soldiery_, political plan for the regulation of, I. 449.
 _Payments_, those made by bankers regulate all others, I. 615.
 _Petty_, Sir William, his computations of the number of inhabitants and
    consumption of provisions in England, I. 41.
 _Population_, how limited, I. 18. 113.
   What the most essential requisite for, _id._ 25.
   Reflexions on the best means for promoting, _id._ 72.
   Inquiry into the state of, in Great Britain, I. 95.
   Antient and modern, politically considered, _id._ 125.
 _Populous_, inquiry into the meaning of this word, when affirmed of a
    country, I. 102.
 _Populousness of antient nations_, inquiry into the question
    concerning, I. 38.
 _Posts for the conveyance of letters_, their great use in commerce, I.
    180.
 _Pound sterling_, two legal ones in England, I. 568.
   Current value of, _id._ 569.
   How determined, _id._ 570.
   What the good measure of, _id._ _1_
   The value of, how marked by bullion, _id._ 571.
   How to fix it at the standard of Queen Elizabeth, _id._ 587.
   The consequences of this reformation, _id._ 588.
 _Premiums on exportation of commodities_, reflexions on, I. 297.
 _Prerogative_, regal, often arbitrarily exercised, from a view to
    establish public liberty on a more extensive bottom, I. 248.
 _Price_, what understood by, II. 46.
 _Prices_, how regulated on necessaries and on superfluities, I. 440.
   The rise of, on articles of home consumption accounted for, II. 9.
   How kept down on articles of exportation, _id._ _1_
 _Princes_, how those who incline to rob their subjects may avoid
    robbing themselves at the same time, II. 65.
 _Producers and consumers_, an analysis of the principles which
    influence the alterations in the political balance between, I. 264.
 _Profit and loss_, explained and distinguished, I. 206.
 _Profits_, how they consolidate into prime cost, II. 8.
   Consolidated, the ill effects of, and how to remedy, I. 289.
 _Property_, how regulated under the Spartan government, I. 252.
   Inconsumable, what, I. 360.
   Consumable, what, _id._ 361.
   Consequences of the alienation of both kinds, _id._ _1_
   Incorporeal, _id._ 369.
   Landed and monied, the different ways of life of the possessors of
      each compared, II. 478. _n._
   Permanent, the expediency of its contributing to the burdens of the
      state, I. 387.
   Solid, how understood, II. 149.
 _Provisions_, those produced in most countries, nearly consumed by the
    respective inhabitants, I. 109.
   The consequences of an augmentation in the value of, I. 226.
 _Public money_, heinous nature of all attempts to defeat the
    application of, I. 297.
 _Public spirit_, an improper principle of action in the governed, I.
    164.
 _Public works_, not the produce of the wealth of a nation, I. 464.

                                   Q.

 _Quadrille_, the idea of circulation of wealth in a state, illustrated
    by the game of, I. 375.

                                   R.

 _Rank_, the obligation individuals are under to uphold that which they
    have once attained, I. 313.
 _Remuage_, in the French duties, explained, II. 550 _n._
 _Revenue of England_, at the revolution, its amount, II. 364.
   State of, at the accession of Queen Anne, II. 381.
 _Riches_, an inquiry into the effects of, before the introduction of
    trade and industry, I. 437.
 _Richlieu_, cardinal, his sentiments on the public credit of France,
    II. 367.
   His sentiments of the extortions committed by the farmers of the
      French taxes, _id._ 369.
   Why not capable of being remedied at that time, _id._ 370.
   His scheme for payment of the public debts, _id._ 372.
 _Roads_, the advantages of good ones to a country, pointed out, I. 57.
   The making and improving of, shewn to have a tendency to destroy
      simplicity of manners, I. 459.
 _Romans_, ancient, reflexions on the agriculture of, I. 88.
   The consequences of their subduing the Grecian states, _id._ 439.
 _Rome_, antient, remarks on the disproportion between the prices of
    necessaries and elegances in, I. 403.
   Accounted for, _id._ 439.
   Consular and imperial, its ornaments compared, _id._ 457.

                                   S.

 _Scotland_, remarks on the state of agriculture in, I. 103.
   Similar instances in other parts of Europe, _id._ 105.
   Accounted for, _id._ 106.
   Remark on the variation of the price of oatmeal in, _id._ 403.
   The nature of banking there, II. 155. 179. 184.

 _Security_, real, what, II. 144.

 _Self-interest_, its extensive influence and use, in a political view,
    I. 162.

 _Sensuality_, the term distinguished from those of luxury and excess,
    I. 311.

 _Silver_, in coin, the scarcity of, to what owing, I. 547. 558. 583.
   Why exported preferably to gold, _id._ 567.
   Why any remains in England, _id._ 569.
   Rising in value, _id._ _1_
   The rising of, the debasement of the standard, _id._ 616.
   Question relating to the scarcity of, in England, II. 61.

 _Simplicity of manners_, shewn to be relative, I. 456.

 _Slavery_, the origin of, traced, I. 22.
   Its effects on the multiplication and employment of mankind, _id._
      36.
   Whether industry can be introduced in a state where the former is
      established, _id._ 168.
   Its operation in America, _id._ 169.
   Real, preferable to a nominal liberty, _id._ 244.

 _Society_, primitive, an idea of, illustrated in the history of Jacob
    the patriarch, I. 23.
   Reflexions on the present state of, compared with remote times of
      primitive simplicity, _id._ 69.
   The best bond of, _id._ 84.
   The best principle on which it is to be governed, _id._ 163.

 _Societies_, human, in what respects they all agree, I. 6.

 _Soil_, a rich one, its disadvantageous effects on the inhabitants of
    it, traced, I. 34.
   Why less fruitful countries flourish most, _id._ 35.

 _South-Sea-scheme_, comparison of, with that of the Missisippi, II.
    387. _n._

 _Spain_, remarks on the state of husbandry there, I. 89.
   On the depopulation of, _id._ 107.

 _Spartans_, how prevented from having an intercourse with foreign
    nations, I. 257.
   Their modesty, _id._ 258.
   The only articles of trade among, _id._ _1_
   Observations on their money, _id._ 259.
   Conclusions drawn from a supposed adoption of their system by any
      modern nation, _id._ _1_
   See _Lycurgus_.

 _Spirit of a people_, whereon formed, I. 8.

 _Standard of English coinage_, remarks on, I. 558.
   When attached to the gold coin, _id._ 560.
   How shewn to have been debased, _id._ 574.
   Not the same now with that of Queen Elizabeth, _id._ 578.
   Anecdotes of its alterations, _id._ _1_
   The debasing of, shewn chiefly to affect permanent contracts, _id._
      581.
   In what sense debased by law, and in what sense, by the operation of
      political causes, _id._ 614.
   Of Elizabeth, its advantage over that of Mary I. _id._ 621.
   Alteration of, how it affects different interests, _id._ 632.
   A more easy method of making a change in, proposed, _id._ 633.
   Whether it is the interest of princes to debase, II. 64.
   The proper arguments against it, _id._ 67.

 _Standing armies_, the nature and use of, explained, I. 442.
   The consequence of trade and industry, _id._ 445.
   The history of, _id._ 446.

 _State_, how to preserve a trading one from decay, I. 224.
   Every change in, advantageous to some class or other, _id._ 428.

 _Statesman_, the term defined, I. 149. 151.
   Modern, his extraordinary influence and advantages, beyond those of
      former ages, _id._ 321.
   The criterion of his abilities, _id._ 377.
   His actions not to be estimated by the rules of private morality,
      _id._ 482.

 _Stews_, public, how far expedient, I. 386.

 _Subordination_, how produced in society, I. 21.
   Political, explained and distinguished, _id._ 238.
   The boundaries of, deduced, _id._ 242.
   Wherein that which now subsists in trading nations differs from that
      which obtained under the old feudal systems, _id._ 248.
 _Superfluities_, domestic competition in the manufacture of them, to be
    discouraged, _id._ 271.

                                   T.

 _Taille_, in the French taxes, explained, II. 496. _n._
 _Tariffee_, in the French taxes, explained, II. 498. _n._
 _Taxes_, general reflexions on, I. 13.
   From what principle the imposition of them is justifiable; and the
      proper application of them, _id._ 269.
   The proper use of, in regulating the several articles of trade, to
      suit temporary circumstances, _id._ 321.
   Why the right of imposing, scarcely any where attached to royalty,
      _id._ 335.
   The plan of, under pure monarchies, and under limited monarchies,
      compared, _id._ 353.
   The necessity of, under a decay of foreign trade, _id._ 354.
   Their internal effects on the people, _id._ 371.
   Their operation on industry, _id._ 385.
   The expediency of distinguishing raisers and consumers in, _id._ 388.
   To be regulated by the proportion between foreign and domestic
      circulation, _id._ 390.
   Only a liquidation of the antient personal services, _id._ 442.
   History of, _id._ 443.
   The perpetuity of, argued, _id._ 445.
   The consequences of a total cessation of, II. 461.
   The word defined, and the various kinds of, specified, _id._ 484.
   The various objects of, or funds for taxation, _id._ 486.
   Proportional, affect only the idle, _id._ 488.
   In what manner they raise the price of commodities, _id._ 493.
   Where they ultimately fall, _id._ 494.
   Cumulative, what, in England and in France, _id._ 496.
   The height of, in England, not so prejudicial to its foreign trade,
      as the idleness and luxury of manufacturers, _id._ 504.
   Proportional, their effects, _id._ 507.
   Good method of raising, _id._ 514.
   Cumulative, the nature of, explained, _id._ 518.
   Compared with proportional, _id._ 520.
   How a cumulative tax is convertible into a proportional one, _id._
      _1_
   Consequences of, when the amount is properly applied, _id._ 523.
   Of the extent of taxation, _id._ 527.
   The hardship of, in those instances where no alienation takes place,
      _id._ 530.
   The difficulty of establishing, upon barter, _id._ _1_
   Draw an additional sum of money into circulation, _id._ 531.
   The extent of cumulative taxes, _id._ 538.
   Method of ascertaining the value of landed property, _id._ 539.
   Impossibility of establishing, upon the income springing from money,
      _id._ _1_
   Interest of a whole people considered with respect to, _id._ 542.
   Consequences of abolishing taxes relative to the cumulative interest
      of a whole state, _id._ 543.
   Consequences of such abolition, to those who are fed by the produce
      of taxes, _id._ 546.
   Judiciously imposed, and equitably levied, enrich a nation, _id._
      554.
   Whether they promote industry, _id._ 556.
   Upon land, considerations on, _id._ 561.
   On land, how levied in England, _id._ 565.
   What the most proper method of imposing, on land, _id._ 577.
   What the best method of levying, generally, _id._ 579.
   On land, whether possible to be converted into one of the
      proportional kind, _id._ 592.
 _Taxation_, why so little found under feudal governments, I. 50.
 _Temple_, Sir William, his symbolical representation of a flourishing
    state, I. 71.
 _Theft_, why encouraged by Lycurgus among the Spartans, I. 257.
 _Theory_, reflexions on the benefit of, in the arts, I. 67.
   Its use, in political researches, _id._ 542.
   Not exactly confirmed by experience, and why, II. 8.
   And practice, remarks on the difference between, in political
      subjects, I. 298.
 _Tithes_, under what species of taxation to be ranked, II. 497.
   The most oppressive kind of tax upon landed property, _id._ 568.
 _Trade_, its beneficial tendency traced, I. 118.
   A definition of, _id._ 166.
   Whether the cause or the effect of industry, _id._ 170.
   The progress of, traced, _id._ 175.
   A republican form of government, and those which approach nearest to
      it, most favourable to, _id._ 242.
   Its influence in creating national connexions, _id._ 266.
   Its natural, division, _id._ 301.
   Infant, by what means, to be encouraged, _id._ 302.
   Foreign, the ruling principles of, _id._ 304.
   Inland, as supposed to take place on the extinction of foreign trade,
      _id._ 305.
   Inquiry into the expediency of laying it open, _id._ 424.
   Natural consequences of it, _id._ 425.
   The interest of, examined, _id._ 628.
 _Trade_, inland, how it may be made a resource on the decay of foreign,
    I. 319.
 _Trade_, foreign, passive and active distinguished, I. 184.
   The progress of, traced, _id._ 185.
   Illustrated, _id._ 191.
   An examination of the principles on which it may be established and
      preserved as long as possible, _id._ 267.
   On what it is founded, _id._ 273.
   Inquiry into the causes of the decay of, _id._ 278.
   The proper remedies proposed, _id._ 279, 319.
   Its extensive uses, _id._ 326.
   The proper remedies in cases of successful rivalship in particular
      articles of it, _id._ 328.
   How to put a stop to it in manufactures, when the balance of it turns
      against a nation, _id._ 336.
   Cautions against hasty measures in such instances, _id._ 338.
   The natural consequences which will result upon the cessation of it,
      _id._ 350.
 _Trading nation_, the true policy of, I. 262.
 _Traittes_, in the French taxes, explained, II. 501. _n._
 _Troops_, foreign, how they become necessary to a state, I. 449.
   Plan to supersede the necessity of, _id._ 450.

                                   V.

 _Value_, the exact scale of, what, II. 55.
 _Vauban_, Marechal, observations on his scheme of raising the land-tax
    in France, II. 562, 567.
 _Vice_, the proper method of checking, among a people, I. 386.
 _Vineyards_, reflexions on the political tendency of, I. 88.
 _Visa_, the nature of that commission explained, II. 376.
 _Ustencil_, in the French taxes, what, II. 496. _n._

                                   W.

 _Wants_, reciprocal, the political use of, among a people, I. 28.
 _War_, all history full of, I. 448.
   The different methods of raising the supplies for, by the different
      powers of Europe, II. 371. _n._
 _Wealth of a nation_, the ill consequences of its remaining in few
    hands, I. 26.
   Of antient nations, how differently acquired, _id._ 324.
   Natural consequences of its being withdrawn from foreign trade, to
      domestic circulation, _id._ 351.
   Whether to be estimated by the quantity of coin in it, II. 42.
   The last sacrifice a statesman ought to make in cases of emergency,
      I. 339.
   Observations on that of a trading nation, _id._ 355.
   Two kinds of circulation of, in a state, _id._ 373.
 _Weights_ in different places, the uncertainty of, shewn, II. 323. _n._
 _Wood_, whether an increase in the consumption of, for firing, a public
    disadvantage, I. 145.
 _Wool_, inquiry into the principles which operate in regulating the
    trade in, I. 274.
 _Woollen manufacture_, by what means it has been augmented in England,
    I. 86.
 _Words_, synonimous, observation respecting, I. 310.
 _Work_, an examination into the alterations of the balance between, and
    _demand_, I. 217.
   The proper means of lowering the price of, when increased by the
      augmentation of the value of subsistence, _id._ 227.

                                   X.

 _Xenophon_, his plan for the proper employment of the Athenian people,
    I. 460.

FINIS.

------------------------------------------------------------------------

The reader is desired to correct the following errors, especially such
as are distinguished by an asterisk *, which pervert the sense entirely.

                                ERRATA.

   Page. Line.
      2.    8. of, r. as
      7.    2, 7. manufactures, r. manufacturers
      9.   32. their grains, r. their gains
     71.   26. * 55.162, r. 51.162
     73.   13. * 801.61, r. 801.68
     82.    4. * 1½, r. ½
     85.   15. * 24.572, r. 25.572
     87.    1. * price, r. piece
     93.   15. * 1201.26, r. 120126
    118.   16. this, r. the
    119.   18. * seems, r. comes
    132.   32. * considerable, r. inconsiderable
    143.   27. case, r. ease
    149.    9. property, r. prosperity
    152.   24. that, r. their
    156.    4. advance-profits, r. advance; profits
    157. last. _dele_, back.
    158.   17. _dele_, the
    160.       at the end, _add_, * severely felt.
    168. penult. * of, r. to
    182.   26. * brought, r. bought
    197.   15. * no, r. the same
    249.    3. last, r. East
    254.   13. * 5000, r. 500
    261.   15. he, r. the
    326.    9. * exportation, r. importation
    333.   23. * bills to, r. bills on
    344.   16. exchange-property, r. exchange
    369.   21. * mixed, r. raised
    394.   12. * determinate, r. indeterminate
    406.   14. _after_ King’s library, _add_, and archives of France.
    411.   24. * 1762, r. 1744.
    429. last. 4 444 444, r. 14 444 444

N. B. In page 182. line 10. _for_ quarterly, _read_ half-yearly, _and
then the note at the bottom of the page may be struck out_.

------------------------------------------------------------------------

                           Transcriber’s Note

The last numbered page is p. 646. It is followed by a large table, and
the index, which are not paginated. These have been assigned page
numbers, continuing from ‘646’ for ease of reference here. The Index was
printed in two columns, but is given here in a single column.

Several long accounting tables employ ‘Carry over’ and ‘Brought over’
lines to bridge page breaks. These are no longer required, and have been
removed.

Spelling, generally, is not ‘corrected’, given the age of the text,
unless there is a clear preponderance of an alternate more standard
spelling. ‘Knowledge’ appears three times as ‘knowlege’, but more than
twenty times as ‘knowledge’. Verbs ending with -er (‘enter’, ‘render’)
are frequently spelled without the ‘e’ when used in other tenses, as
‘entred’, ‘rendring’, etc.

The word ‘Missisippi’ appears as the modern variant ‘Mississippi’ in the
table of contents and index. The two instances (pp. 243, 261) in the
text proper have been retained.

Diacritical marks in non-English languages are frequently missing, and
have not been added.

                                  ---

                            Indexing Issues

No attempt was made to validate all the references in the Index. Several
issues did arise during the preparation of this transcription:

The entry for ‘Remuage’ is corrupt, indicating a note on p ‘50?’. The
note now appears as note 46 on p. 550.

The entry for ‘Ustensil’ misspells the word ‘Ustencil’, and transposes
the last digits of the correct page number (‘496’) as ‘469’.

                                  ---

Errors deemed most likely to be the printer’s have been corrected, and
are noted here. The references are to the page and line in the original.
The following issues should be noted.

The changes requested in the Errata table above have also been made, and
are marked with an asterisk. The brackets show the specific change made
to the line. The editor’s final request

 2.8      * [of/as] affecting                              Replaced.
 7.1      * manufacture[r]s                                Inserted.
 9.32     * their g[r]ains will purchase                   Removed.
 15.26      Is not this called par[./?]                    Replaced.
 66.15      _a[n/u] cours du jour_                         Replaced.
 71.26    * 5[5/1].162 : 55.38 :: 100 : 108.2.             Replaced.
 73.13    * 801.6[1/8] :: 1 : 14.47                        Replaced.
 77.13      23 mar[k/c]s 7 ounces 152 grains               Replaced.
 77.22      23 mar[k/c]s 7 ounces 152 grains               Replaced.
 85.15    * _f._ 2[4/5].572 in silver florins              Replaced.
 86.9       [i/I] this case                                Capitalized.
 87.1     * the weight of the p[ri/ie]ce                   Replaced.
 93.15    * 1201[.]26  aces fine                           Removed.
 93.17      263 : 12012[0/6>]                              Replaced.
 103.23     to shew how eve[ry/n] the most surprizing      Replaced.
            effect
 118.16   * 26th chapter of th[is/e] second book           Replaced.
 119.18   * hen a state [seems/comes] to contract          Replaced.
 132.32   * at a very [in]considerable interest            Added.
 143.27   * [c/e]ase of transfer                           Replaced.
 149.9    * depends the pro[per/speri]ty of trade          Replaced.
 152.24   * in security of th[at/eir] good faith           Replaced.
 156.4    * of their advance[-/;]profits[,]                Replaced./Removed.
 157.26   * are quickly thrown[ back] into circulation     Removed.
 158.17   * searching after[  the] principles, not after   Removed.
            facts,
 168.31   * What are the consequences [of/to] circulation  Replaced.
 182.26   * these bills will be b[r]ought from             Removed.
 197.15   * and pay [no/the same] interest                 Replaced.
 249.3    * the [l/E]ast India company                     Replaced.
 254.13   * upon the value of 500[0] livres                Removed.
 261.15   * If that was [t]he case                         Added.
 326.9    * for articles of [ex/im]portation               Replaced.
 333.23   * he will sell his bills [to/on] the country     Replaced.
 344.16   * in regulating exchange[-property].             Removed.
 368.19     far beyond [t]heir due proportion              Restored.
 369.21   * when taxes were [mixed/raised]                 Replaced.
 394.12   * perpetual or [in]determinate annuities         Added.
 406.10   * library[ and archives of France]               Added.
 411.24   * during the war  17[62/44]                      Replaced.
 469.5      the whole [t]he> lender                        Restored.
 524.24     extrava[va]gance of your neighbour             Removed.
 588.5      exportation and  importa[ta]tion               Removed.
 608.20     their own debt[) / (']and it is so,            Reversed.
 613.6      and the fatal catastrop[h]e                    Inserted.
 627.21     In order to make [t]his change of policy       Added.
 646.29     no farther knowle[d]ge                         Inserted.
 659l.22    _Usten[s/c]il_                                 Replaced.

*** END OF THE PROJECT GUTENBERG EBOOK 66710 ***