Public Credit, its Basis, and the Circumstances that endanger its Solidity

The sentiments of lenders and of mankind are more powerfully operated upon by the impressions of the moment, than by any other motive; experience of the past must be very recent, and the prospect of the future very near, to have any sensible effect.

The monstrous breach of faith on the part of the French government in 1721, in regard to its paper-money and the Mississippi share-holders, did not prevent the ready negotiation of a loan of 200,000,000 liv. it 1759; nor did the bankrupt measures of the Abbé Terrai in 1772 prevent the negotiation of fresh loans in 1778 and every subsequent year.

Public credit is the confidence of individuals in the engagements of the ruling power, or government.

This credit is at the extreme point of elevation, when the public creditor gets no higher interest, than he would by lending on the best pri- vate securities; which is a clear proof, that the lenders require no premium of insurance to cover the extra risk they incur, and that in their estimation there is no such extra risk.

Public credit never reaches this elevation, except where the government is so constituted, as to find great difficulty in breaking its engagements, and where, moreover, its resources are known to be equal to its wants; for which latter reason, public credit is never very high, unless where the financial accounts of the nation are subject to general publicity.

In other points of view, the credit of individuals is better founded than that of the government. There is no compulsory process against the latter, for the breach of its engagements; nor do governments ever husband the national resources with nearly the care and attention of individuals.

Besides, in the event of external or internal subversion, individuals may withdraw their property from the wreck much better than governments can.

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

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

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

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

Numerous commercial failures, political or national calamities, litigation. fraud or violence, may ruin him entirely; but the supplies of a government are derived from such various quarters, that the individual calamities of its subjects can op- erate but partially upon the revenue of the state.

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

redeems, as England has constantly done, since the year 1793 to the present time. Whencesoever the amount of the sinking- fund be derived, whether it be merely the product of a fresh:

tax, or that product, augmented by the interest on the extinguished debt, if the government borrow a million for every million of debt that it pays off, it creates an annual charge of precisely the same amount as that extinguished= it is precisely the same thing, as lending to itself the million devoted to the purpose of redemption. Indeed, the latter course would save the expense of the operation. This position has been fully established in an excellent work, by professor Hamilton, 111 which is quite conclusive upon the subject. The enormous burthens of the people of England, the scandalous abuse its government has made of the power of borrowing, and her substitution of paper-money in place of specie, will have pro- duced some benefit at least; inasmuch as they have assisted the solution of many problems, highly interesting to the hap- piness of nations, and given warning to all future generations, to beware of the like excesses. By the establishment of sinking-funds, well-ordered govern- ments have found means to extinguish and discharge their redeemable debt. The constant operation of this contrivance contributes more than any thing else to the consolidation of public credit. The mode of proceeding is simply this: Suppose that the state borrows 100 millions of dollars at an interest of 5 per cent; to pay that interest, it must appropriate a portion of the national revenue to the amount of 5 millions of dollars. For this purpose, it usually imposes a tax calcu- lated to produce this sum annually. If the tax be made to pro- duce somewhat more, say 5,462,400 dollars, and the surplus of 462,400 dollars be thrown into a particular fund, and laid out annually, in the purchase of government debentures to that amount in the market, and if, moreover, in addition to this surplus, the interest likewise upon the debt thus extin- guished, be annually employed in such purchases, the whole principal debt will be extinguished at the end of fifty years. This is the mode in which a sinking-fund operates. The effi- cacy of this expedient depends upon the progressive power of compound interest; that is to say, the gradual augmenta- tion of the interest of capital, by the addition of interest upon the arrears of interest, reckoned from certain stated periods. It must be evident, that the grand requisite to the efficiency of a sinking-fund is, the punctual and inviolable application of the sums appropriated to the purpose of redemption. Yet this has never been rigidly adhered to, even in England, where consistency and good faith to the creditors are a point of honour with the government. So that English writers put no faith in the extinction of the debt by the operation of the sink- ing-fund= nay, Smith makes no scruple of declaring, that na- tional debts have never been extinguished except by national bankruptcy.

By an annual instalment of not more than 10% on its own interest, the principal of a debt bear- ing an interest of 5 per cent. may be extinguished in less than 50 years. However, the sale of the debentures being voluntary, if the holders will not sell at par, that is to say, at 20 years purchase, the redemption, in this way, will take somewhat longer time; but this very state of the market will be a convincing proof of the high ratio of national credit.

On the other hand, if the credit decline, so that the same sum will purchase a larger amount of debentures, the extinction of the debt will be effected in a shorter period. So that the lower public credit falls, the more powerful is the operation of a sinking-fund to revive it; and that fund grows less efficient, exactly in proportion as it becomes less requisite.

What is the effect of a national bankruptcy on the relative condition of individuals, and the internal economy of the nation. In ordinary cases, when a government commits an act of bankruptcy, it adds to the revenues of the tax-payers the whole amount that it discontinues paying to the public creditors.

Nay, it goes somewhat further= for it remits likewise the charges of collection and management of the revenue and the debt.

A nation burthened with 100 millions of annual interest on its debt, whereon the charges above mentioned should amount to 30 per cent 112 more, might by a bankruptcy remit to the tax-payers 130 millions, while it stript its creditors of 100 millions only.

To the establishment of such a fund, has the long-continued public credit of Great Britain been attributed, and her ability still to go or borrowing, in spite of a debt of more than 800 millions sterling. 110 And doubtless this it is, that has made Smith declare sinking- funds, which were contrived expressly to reduce national debt, the main instruments of their increase. Had not governments the happy knack of abusing resources of every kind, they would soon grow too rich and powerful.

In England the effect would be more complicated; because she does not pay the dividends on her debt wholly out of the annual proceeds of taxation; at least, not at the moment of my writing; but annually borrows a sum nearly equal to the interest of her debt. 113 Were she to commit an act of bankruptcy, the annual loans of 40 millions sterling, more or less, would be withdrawn from unproductive consumption by the public creditors, and be applicable to the purposes of re-productive

A sinking-fund is a complete delusion, whenever a government continues borrowing on one hand, as much as it redeems on the other; and a fortiori, when it borrows more than it consumption: for it may fairly be supposed, that the capitalists who accumulate and lend to the state, would look out for some profitable investment.

In this point of view, the operation would tend vastly to the increase of the national capital and revenue= but the execution would be attended with very disastrous immediate consequences= for this annual amount of 40 millions would be withdrawn from the class of consumers, who have no other means of subsistence, and would be utterly unable to make good their losses in any other way, for want of both personal industry, and of the command of capital.

political power of Prussia brought into imminent hazard by those very savings, which were destined by Frederick III to its consolidation.

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