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An Inquiry Into The Nature And Causes Of The Wealth Of Nations - Chapter 3

1. Introduction And Plan Of The Work

2. Book 1, Chapter 1

3. Chapter 2

4. Chapter 3

5. Chapter 4

6. Chapter 5

7. Chapter 6

8. Chapter 7

9. Chapter 8

10. Chapter 8 continue

11. Chapter 9

12. Chapter 10

13. Chapter 10 continue

14. Chapter 11

15. Chapter 11 continue

16. Chapter 11 continue.

17. Chapter 11 continue..

18. Chapter 11 continue...

19. Conclusion of the Chapter 11

20. Book 2 Introduction

21. Chapter 1

22. Chapter II

23. Chapter II continue

24. Chapter II continue

25. Chapter 3

26. Chapter 4

27. Chapter 5

28. Book 3, Chapter 1

29. Chapter 2

30. Chapter 3

31. Chapter 4

32. Book 4, Chapter 1

33. Chapter 1 continue

34. Chapter 2

35. Chapter 3, Part 1

36. Chapter 3, Part 2

37. Chapter 4

38. Chapter 5

39. Chapter 5 continue

40. Chapter 6

41. Chapter 7, Part 1

42. Chapter 7, Part 2

43. Chapter 7, Part 3

44. Chapter 7, Part 3 continue

45. Chapter 8

46. Chapter 9

47. Book 5, Chapter 1, Part 1

48. Chapter 1, Part 2

49. Chapter 1, Part 3

50. Chapter 1, Part 3 continue

51. Chapter 1, Part 3 continue B

52. Chapter 1, Part 4

53. Chapter 2, Part 1

54. Chapter 2, Part 2

55. Chapter 2, Part 2 continue

56. Chapter 2, Part 2 continue B

57. Chapter 2, Part 2 continue C

58. Chapter 2, Part 2 continue D

59. Chapter 3

60. Chapter 3 continue

Chapter III. Of Public Debts.

In that rude state of society which precedes the extension of commerce
and the improvement of manufactures; when those expensive luxuries,
which commerce and manufactures can alone introduce, are altogether
unknown; the person who possesses a large revenue, I have endeavoured to
show in the third book of this Inquiry, can spend or enjoy that revenue
in no other way than by maintaining nearly as many people as it can
maintain. A large revenue may at all times be said to consist in the
command of a large quantity of the necessaries of life. In that rude
state of things, it is commonly paid in a large quantity of those
necessaries, in the materials of plain food and coarse clothing, in
corn and cattle, in wool and raw hides. When neither commerce nor
manufactures furnish any thing for which the owner can exchange the
greater part of those materials which are over and above his own
consumption, he can do nothing with the surplus, but feed and clothe
nearly as many people as it will feed and clothe. A hospitality in which
there is no luxury, and a liberality in which there is no ostentation,
occasion, in this situation of things, the principal expenses of the
rich and the great. But these I have likewise endeavoured to show, in
the same book, are expenses by which people are not very apt to ruin
themselves. There is not, perhaps, any selfish pleasure so frivolous, of
which the pursuit has not sometimes ruined even sensible men. A passion
for cock-fighting has ruined many. But the instances, I believe, are
not very numerous, of people who have been ruined by a hospitality
or liberality of this kind; though the hospitality of luxury, and the
liberality of ostentation have ruined many. Among our feudal ancestors,
the long time during which estates used to continue in the same family,
sufficiently demonstrates the general disposition of people to live
within their income. Though the rustic hospitality, constantly exercised
by the great landholders, may not, to us in the present times, seem
consistent with that order which we are apt to consider as inseparably
connected with good economy; yet we must certainly allow them to have
been at least so far frugal, as not commonly to have spent their whole
income. A part of their wool and raw hides, they had generally an
opportunity of selling for money. Some part of this money, perhaps, they
spent in purchasing the few objects of vanity and luxury, with which the
circumstances of the times could furnish them; but some part of it they
seem commonly to have hoarded. They could not well, indeed, do any thing
else but hoard whatever money they saved. To trade, was disgraceful to
a gentleman; and to lend money at interest, which at that time was
considered as usury, and prohibited bylaw, would have been still more
so. In those times of violence and disorder, besides, it was convenient
to have a hoard of money at hand, that in case they should be driven
from their own home, they might have something of known value to carry
with them to some place of safety. The same violence which made it
convenient to hoard, made it equally convenient to conceal the hoard.
The frequency of treasure-trove, or of treasure found, of which no owner
was known, sufficiently demonstrates the frequency, in those times,
both of hoarding and of concealing the hoard. Treasure-trove was then
considered as an important branch of the revenue of the sovereign. All
the treasure-trove of the kingdom would scarce, perhaps, in the present
times, make an important branch of the revenue of a private gentleman of
a good estate.

The same disposition, to save and to hoard, prevailed in the sovereign,
as well as in the subjects. Among nations, to whom commerce and
manufacture are little known, the sovereign, it has already been
observed in the Fourth book, is in a situation which naturally disposes
him to the parsimony requisite for accumulation. In that situation, the
expense, even of a sovereign, cannot be directed by that vanity which
delights in the gaudy finery of a court. The ignorance of the times
affords but few of the trinkets in which that finery consists. Standing
armies are not then necessary; so that the expense, even of a sovereign,
like that of any other great lord can be employed in scarce any thing
but bounty to his tenants, and hospitality to his retainers. But bounty
and hospitality very seldom lead to extravagance; though vanity almost
always does. All the ancient sovereigns of Europe, accordingly, it has
already been observed, had treasures. Every Tartar chief, in the present
times, is said to have one.

In a commercial country, abounding with every sort of expensive luxury,
the sovereign, in the same manner as almost all the great proprietors
in his dominions, naturally spends a great part of his revenue in
purchasing those luxuries. His own and the neighbouring countries supply
him abundantly with all the costly trinkets which compose the splendid,
but insignificant, pageantry of a court. For the sake of an inferior
pageantry of the same kind, his nobles dismiss their retainers,
make their tenants independent, and become gradually themselves as
insignificant as the greater part of the wealthy burghers in his
dominions. The same frivolous passions, which influence their conduct,
influence his. How can it be supposed that he should be the only rich
man in his dominions who is insensible to pleasures of this kind? If he
does not, what he is very likely to do, spend upon those pleasures so
great a part of his revenue as to debilitate very much the defensive
power of the state, it cannot well be expected that he should not spend
upon them all that part of it which is over and above what is necessary
for supporting that defensive power. His ordinary expense becomes equal
to his ordinary revenue, and it is well if it does not frequently
exceed it. The amassing of treasure can no longer be expected; and
when extraordinary exigencies require extraordinary expenses, he must
necessarily call upon his subjects for an extraordinary aid. The present
and the late king of Prussia are the only great princes of Europe, who,
since the death of Henry IV. of France, in 1610, are supposed to
have amassed any considerable treasure. The parsimony which leads to
accumulation has become almost as rare in republican as in monarchical
governments. The Italian republics, the United Provinces of the
Netherlands, are all in debt. The canton of Berne is the single republic
in Europe which has amassed any considerable treasure. The other Swiss
republics have not. The taste for some sort of pageantry, for splendid
buildings, at least, and other public ornaments, frequently prevails as
much in the apparently sober senate-house of a little republic, as in
the dissipated court of the greatest king.

The want of parsimony, in time of peace, imposes the necessity of
contracting debt in time of war. When war comes, there is no money in
the treasury, but what is necessary for carrying on the ordinary expense
of the peace establishment. In war, an establishment of three or four
times that expense becomes necessary for the defence of the state;
and consequently, a revenue three or four times greater than the peace
revenue. Supposing that the sovereign should have, what he scarce ever
has, the immediate means of augmenting his revenue in proportion to the
augmentation of his expense; yet still the produce of the taxes, from
which this increase of revenue must be drawn, will not begin to come
into the treasury, till perhaps ten or twelve months after they are
imposed. But the moment in which war begins, or rather the moment in
which it appears likely to begin, the army must be augmented, the fleet
must be fitted out, the garrisoned towns must be put into a posture
of defence; that army, that fleet, those garrisoned towns, must be
furnished with arms, ammunition, and provisions. An immediate and great
expense must be incurred in that moment of immediate danger, which will
not wait for the gradual and slow returns of the new taxes. In this
exigency, government can have no other resource but in borrowing.

The same commercial state of society which, by the operation of
moral causes, brings government in this manner into the necessity of
borrowing, produces in the subjects both an ability and an inclination
to lend. If it commonly brings along with it the necessity of borrowing,
it likewise brings with it the facility of doing so.

A country abounding with merchants and manufacturers, necessarily
abounds with a set of people through whose hands, not only their own
capitals, but the capitals of all those who either lend them money, or
trust them with goods, pass as frequently, or more frequently, than the
revenue of a private man, who, without trade or business, lives upon
his income, passes through his hands. The revenue of such a man can
regularly pass through his hands only once in a year. But the whole
amount of the capital and credit of a merchant, who deals in a trade of
which the returns are very quick, may sometimes pass through his hands
two, three, or four times in a year. A country abounding with merchants
and manufacturers, therefore, necessarily abounds with a set of people,
who have it at all times in their power to advance, if they chuse to do
so, a very large sum of money to government. Hence the ability in the
subjects of a commercial state to lend.

Commerce and manufactures can seldom flourish long in any state which
does not enjoy a regular administration of justice; in which the people
do not feel themselves secure in the possession of their property; in
which the faith of contracts is not supported by law; and in which
the authority of the state is not supposed to be regularly employed
in enforcing the payment of debts from all those who are able to pay.
Commerce and manufactures, in short, can seldom flourish in any state,
in which there is not a certain degree of confidence in the justice
of government. The same confidence which disposes great merchants and
manufacturers upon ordinary occasions, to trust their property to the
protection of a particular government, disposes them, upon extraordinary
occasions, to trust that government with the use of their property.
By lending money to government, they do not even for a moment diminish
their ability to carry on their trade and manufactures; on the
contrary, they commonly augment it. The necessities of the state render
government, upon most occasions willing to borrow upon terms extremely
advantageous to the lender. The security which it grants to the original
creditor, is made transferable to any other creditor; and from the
universal confidence in the justice of the state, generally sells in the
market for more than was originally paid for it. The merchant or
monied man makes money by lending money to government, and instead of
diminishing, increases his trading capital. He generally considers it
as a favour, therefore, when the administration admits him to a share
in the first subscription for a new loan. Hence the inclination or
willingness in the subjects of a commercial state to lend.

The government of such a state is very apt to repose itself upon this
ability and willingness of its subjects to lend it their money on
extraordinary occasions. It foresees the facility of borrowing, and
therefore dispenses itself from the duty of saving.

In a rude state of society, there are no great mercantile or
manufacturing capitals. The individuals, who hoard whatever money they
can save, and who conceal their hoard, do so from a distrust of the
justice of government; from a fear, that if it was known that they had
a hoard, and where that hoard was to be found, they would quickly be
plundered. In such a state of things, few people would be able,
and nobody would be willing to lend their money to government on
extraordinary exigencies. The sovereign feels that he must provide
for such exigencies by saving, because he foresees the absolute
impossibility of borrowing. This foresight increases still further his
natural disposition to save.

The progress of the enormous debts which at present oppress, and will
in the long-run probably ruin, all the great nations of Europe, has
been pretty uniform. Nations, like private men, have generally begun
to borrow upon what may be called personal credit, without assigning
or mortgaging any particular fund for the payment of the debt; and
when this resource has failed them, they have gone on to borrow upon
assignments or mortgages of particular funds.

What is called the unfunded debt of Great Britain, is contracted in the
former of those two ways. It consists partly in a debt which bears, or
is supposed to bear, no interest, and which resembles the debts that
a private man contracts upon account; and partly in a debt which bears
interest, and which resembles what a private man contracts upon his bill
or promissory-note. The debts which are due, either for extraordinary
services, or for services either not provided for, or not paid at the
time when they are performed; part of the extraordinaries of the army,
navy, and ordnance, the arrears of subsidies to foreign princes, those
of seamen's wages, etc. usually constitute a debt of the first kind.
Navy and exchequer bills, which are issued sometimes in payment of a
part of such debts, and sometimes for other purposes, constitute a debt
of the second kind; exchequer bills bearing interest from the day on
which they are issued, and navy bills six months after they are issued.
The bank of England, either by voluntarily discounting those bills
at their current value, or by agreeing with government for certain
considerations to circulate exchequer bills, that is, to receive them
at par, paying the interest which happens to be due upon them, keeps up
their value, and facilitates their circulation, and thereby frequently
enables government to contract a very large debt of this kind. In
France, where there is no bank, the state bills (billets d'etat {See
Examen des Reflections Politiques sur les Finances.}) have sometimes
sold at sixty and seventy per cent. discount. During the great recoinage
in king William's time, when the bank of England thought proper to put a
stop to its usual transactions, exchequer bills and tallies are said to
have sold from twenty-five to sixty per cent. discount; owing partly, no
doubt, to the supposed instability of the new government established by
the Revolution, but partly, too, to the want of the support of the bank
of England.

When this resource is exhausted, and it becomes necessary, in order to
raise money, to assign or mortgage some particular branch of the public
revenue for the payment of the debt, government has, upon different
occasions, done this in two different ways. Sometimes it has made this
assignment or mortgage for a short period of time only, a year, or a few
years, for example; and sometimes for perpetuity. In the one case,
the fund was supposed sufficient to pay, within the limited time, both
principal and interest of the money borrowed. In the other, it was
supposed sufficient to pay the interest only, or a perpetual annuity
equivalent to the interest, government being at liberty to redeem, at
any time, this annuity, upon paying back the principal sum borrowed.
When money was raised in the one way, it was said to be raised by
anticipation; when in the other, by perpetual funding, or, more shortly,
by funding.

In Great Britain, the annual land and malt taxes are regularly
anticipated every year, by virtue of a borrowing clause constantly
inserted into the acts which impose them. The bank of England generally
advances at an interest, which, since the Revolution, has varied from
eight to three per cent., the sums of which those taxes are granted,
and receives payment as their produce gradually comes in. If there is a
deficiency, which there always is, it is provided for in the supplies
of the ensuing year. The only considerable branch of the public revenue
which yet remains unmortgaged, is thus regularly spent before it comes
in. Like an improvident spendthrift, whose pressing occasions will not
allow him to wait for the regular payment of his revenue, the state is
in the constant practice of borrowing of its own factors and agents, and
of paying interest for the use of its own money.

In the reign of king William, and during a great part of that of queen
Anne, before we had become so familiar as we are now with the practice
of perpetual funding, the greater part of the new taxes were imposed but
for a short period of time (for four, five, six, or seven years only),
and a great part of the grants of every year consisted in loans
upon anticipations of the produce of those taxes. The produce being
frequently insufficient for paying, within the limited term, the
principal and interest of the money borrowed, deficiencies arose; to
make good which, it became necessary to prolong the term.

In 1697, by the 8th of William III., c. 20, the deficiencies of several
taxes were charged upon what was then called the first general mortgage
or fund, consisting of a prolongation to the first of August 1706, of
several different taxes, which would have expired within a shorter term,
and of which the produce was accumulated into one general fund. The
deficiencies charged upon this prolonged term amounted to 5,160,459:
14: 9.

In 1701, those duties, with some others, were still further prolonged,
for the like purposes, till the first of August 1710, and were called
the second general mortgage or fund. The deficiencies charged upon it
amounted to 2,055,999: 7: 11.

In 1707, those duties were still further prolonged, as a fund for new
loans, to the first of August 1712, and were called the third general
mortgage or fund. The sum borrowed upon it was 983,254:11:9.

In 1708, those duties were all (except the old subsidy of tonnage and
poundage, of which one moiety only was made a part of this fund, and a
duty upon the importation of Scotch linen, which had been taken off by
the articles of union) still further continued, as a fund for new loans,
to the first of August 1714, and were called the fourth general mortgage
or fund. The sum borrowed upon it was 925,176:9:2.

In 1709, those duties were all ( except the old subsidy of tonnage and
poundage, which was now left out of this fund altogether ) still further
continued, for the same purpose, to the first of August 1716, and were
called the fifth general mortgage or fund. The sum borrowed upon it was

In 1710, those duties were again prolonged to the first of August 1720,
and were called the sixth general mortgage or fund. The sum borrowed
upon it was 1,296,552:9:11.

In 1711, the same duties (which at this time were thus subject to four
different anticipations), together with several others, were continued
for ever, and made a fund for paying the interest of the capital of
the South-sea company, which had that year advanced to government, for
paying debts, and making good deficiencies, the sum of 9,177,967:15:4d,
the greatest loan which at that time had ever been made.

Before this period, the principal, so far as I have been able to
observe, the only taxes, which, in order to pay the interest of a debt,
had been imposed for perpetuity, were those for paying the interest
of the money which had been advanced to government by the bank and
East-India company, and of what it was expected would be advanced, but
which was never advanced, by a projected land bank. The bank fund at
this time amounted to 3,375,027:17:10, for which was paid an
annuity or interest of 206,501:15:5d. The East-India fund amounted to
3,200,000, for which was paid an annuity or interest of 160,000; the
bank fund being at six per cent., the East-India fund at five per cent.

In 1715, by the first of George I., c. 12, the different taxes which
had been mortgaged for paying the bank annuity, together with several
others, which, by this act, were likewise rendered perpetual, were
accumulated into one common fund, called the aggregate fund, which was
charged not only with the payment of the bank annuity, but with several
other annuities and burdens of different kinds. This fund was afterwards
augmented by the third of George I., c.8., and by the fifth of George
I., c. 3, and the different duties which were then added to it were
likewise rendered perpetual.

In 1717, by the third of George I., c. 7, several other taxes were
rendered perpetual, and accumulated into another common fund, called
the general fund, for the payment of certain annuities, amounting in the
whole to 724,849:6:10.

In consequence of those different acts, the greater part of the taxes,
which before had been anticipated only for a short term of years were
rendered perpetual, as a fund for paying, not the capital, but the
interest only, of the money which had been borrowed upon them by
different successive anticipations.

Had money never been raised but by anticipation, the course of a
few years would have liberated the public revenue, without any other
attention of government besides that of not overloading the fund, by
charging it with more debt than it could pay within the limited term,
and not of anticipating a second time before the expiration of the first
anticipation. But the greater part of European governments have been
incapable of those attentions. They have frequently overloaded the fund,
even upon the first anticipation; and when this happened not to be the
case, they have generally taken care to overload it, by anticipating
a second and a third time, before the expiration of the first
anticipation. The fund becoming in this manner altogether insufficient
for paying both principal and interest of the money borrowed upon it,
it became necessary to charge it with the interest only, or a perpetual
annuity equal to the interest; and such improvident anticipations
necessarily gave birth to the more ruinous practice of perpetual
funding. But though this practice necessarily puts off the liberation of
the public revenue from a fixed period, to one so indefinite that it is
not very likely ever to arrive; yet, as a greater sum can, in all cases,
be raised by this new practice than by the old one of anticipation, the
former, when men have once become familiar with it, has, in the great
exigencies of the state, been universally preferred to the latter. To
relieve the present exigency, is always the object which principally
interests those immediately concerned in the administration of public
affairs. The future liberation of the public revenue they leave to the
care of posterity.

During the reign of queen Anne, the market rate of interest had fallen
from six to five per cent.; and, in the twelfth year of her reign, five
per cent. was declared to be the highest rate which could lawfully be
taken for money borrowed upon private security. Soon after the
greater part of the temporary taxes of Great Britain had been rendered
perpetual, and distributed into the aggregate, South-sea, and general
funds, the creditors of the public, like those of private persons, were
induced to accept of five per cent. for the interest of their money,
which occasioned a saving of one per cent. upon the capital of the
greater part or the debts which had been thus funded for perpetuity, or
of one-sixth of the greater part of the annuities which were paid out of
the three great funds above mentioned. This saving left a considerable
surplus in the produce of the different taxes which had been accumulated
into those funds, over and above what was necessary for paying the
annuities which were now charged upon them, and laid the foundation of
what has since been called the sinking fund. In 1717, it amounted to
523,454:7:7. In 1727, the interest of the greater part of the public
debts was still further reduced to four per cent.; and, in 1753 and
1757, to three and a-half, and three per cent., which reductions still
further augmented the sinking fund.

A sinking fund, though instituted for the payment of old, facilitates
very much the contracting of new debts. It is a subsidiary fund, always
at hand, to be mortgaged in aid of any other doubtful fund, upon which
money is proposed to be raised in any exigency of the state. Whether the
sinking fund of Great Britain has been more frequently applied to the
one or to other of those two purposes, will sufficiently appear by and

Besides those two methods of borrowing, by anticipations and by a
perpetual funding, there are two other methods, which hold a sort of
middle place between them; these are, that of borrowing upon annuities
for terms of years, and that of borrowing upon annuities for lives.

During the reigns of king William and queen Anne, large sums were
frequently borrowed upon annuities for terms of years, which were
sometimes longer and sometimes shorter. In 1695, an act was passed for
borrowing one million upon an annuity of fourteen per cent., or 140,000
a-year, for sixteen years. In 1691, an act was passed for borrowing
a million upon annuities for lives, upon terms which, in the present
times, would appear very advantageous; but the subscription was not
filled up. In the following year, the deficiency was made good, by
borrowing upon annuities for lives, at fourteen per cent. or a little
more than seven years purchase. In 1695, the persons who had purchased
those annuities were allowed to exchange them for others of ninety-six
years, upon paying into the exchequer sixty-three pounds in the hundred;
that is, the difference between fourteen per cent. for life, and
fourteen per cent. for ninety-six years, was sold for sixty-three
pounds, or for four and a-half years purchase. Such was the supposed
instability of government, that even these terms procured few
purchasers. In the reign of queen Anne, money was, upon different
occasions, borrowed both upon annuities for lives, and upon annuities
for terms of thirty-two, of eighty-nine, of ninety-eight, and of
ninety-nine years. In 1719, the proprietors of the annuities for
thirty-two years were induced to accept, in lieu of them, South-sea
stock to the amount of eleven and a-half years purchase of the
annuities, together with an additional quantity of stock, equal to the
arrears which happened then to be due upon them. In 1720, the greater
part of the other annuities for terms of years, both long and short,
were subscribed into the same fund. The long annuities, at that time,
amounted to 666,821: 8:3 a-year. On the 5th of January 1775, the
remainder of them, or what was not subscribed at that time, amounted
only to 136,453:12:8d.

During the two wars which began in 1739 and in 1755, little money was
borrowed, either upon annuities for terms of years, or upon those for
lives. An annuity for ninety-eight or ninety-nine years, however, is
worth nearly as much as a perpetuity, and should therefore, one might
think, be a fund for borrowing nearly as much. But those who, in order
to make family settlements, and to provide for remote futurity, buy
into the public stocks, would not care to purchase into one of which
the value was continually diminishing; and such people make a very
considerable proportion, both of the proprietors and purchasers of
stock. An annuity for a long term of years, therefore, though its
intrinsic value may be very nearly the same with that of a perpetual
annuity, will not find nearly the same number of purchasers. The
subscribers to a new loan, who mean generally to sell their subscription
as soon as possible, prefer greatly a perpetual annuity, redeemable by
parliament, to an irredeemable annuity, for a long term of years, of
only equal amount. The value of the former may be supposed always
the same, or very nearly the same; and it makes, therefore, a more
convenient transferable stock than the latter.

During the two last-mentioned wars, annuities, either for terms of years
or for lives, were seldom granted, but as premiums to the subscribers of
a new loan, over and above the redeemable annuity or interest, upon the
credit of which the loan was supposed to be made. They were granted,
not as the proper fund upon which the money was borrowed, but as an
additional encouragement to the lender.

Annuities for lives have occasionally been granted in two different
ways; either upon separate lives, or upon lots of lives, which, in
French, are called tontines, from the name of their inventor. When
annuities are granted upon separate lives, the death of every individual
annuitant disburdens the public revenue, so far as it was affected by
his annuity. When annuities are granted upon tontines, the liberation
of the public revenue does not commence till the death of all the
annuitants comprehended in one lot, which may sometimes consist of
twenty or thirty persons, of whom the survivors succeed to the annuities
of all those who die before them; the last survivor succeeding to the
annuities of the whole lot. Upon the same revenue, more money can always
be raised by tontines than by annuities for separate lives. An annuity,
with a right of survivorship, is really worth more than an equal annuity
for a separate life; and, from the confidence which every man naturally
has in his own good fortune, the principle upon which is founded the
success of all lotteries, such an annuity generally sells for something
more than it is worth. In countries where it is usual for government
to raise money by granting annuities, tontines are, upon this account,
generally preferred to annuities for separate lives. The expedient
which will raise most money, is almost always preferred to that which
is likely to bring about, in the speediest manner, the liberation of the
public revenue.

In France, a much greater proportion of the public debts consists in
annuities for lives than in England. According to a memoir presented by
the parliament of Bourdeaux to the king, in 1764, the whole public debt
of France is estimated at twenty-four hundred millions of livres; of
which the capital, for which annuities for lives had been granted, is
supposed to amount to three hundred millions, the eighth part of the
whole public debt. The annuities themselves are computed to amount
to thirty millions a-year, the fourth part of one hundred and twenty
millions, the supposed interest of that whole debt. These estimations,
I know very well, are not exact; but having been presented by so
very respectable a body as approximations to the truth, they may, I
apprehend, be considered as such. It is not the different degrees of
anxiety in the two governments of France and England for the liberation
of the public revenue, which occasions this difference in their
respective modes of borrowing; it arises altogether from the different
views and interests of the lenders.

In England, the seat of government being in the greatest mercantile city
in the world, the merchants are generally the people who advance money
to government. By advancing it, they do not mean to diminish, but, on
the contrary, to increase their mercantile capitals; and unless they
expected to sell, with some profit, their share in the subscription
for a new loan, they never would subscribe. But if, by advancing their
money, they were to purchase, instead of perpetual annuities, annuities
for lives only, whether their own or those of other people, they would
not always be so likely to sell them with a profit. Annuities upon their
own lives they would always sell with loss; because no man will give for
an annuity upon the life of another, whose age and state of health are
nearly the same with his own, the same price which he would give for one
upon his own. An annuity upon the life of a third person, indeed, is,
no doubt, of equal value to the buyer and the seller; but its real value
begins to diminish from the moment it is granted, and continues to do
so, more and more, as long as it subsists. It can never, therefore, make
so convenient a transferable stock as a perpetual annuity, of which the
real value may be supposed always the same, or very nearly the same.

In France, the seat of government not being in a great mercantile city,
merchants do not make so great a proportion of the people who advance
money to government. The people concerned in the finances, the
farmers-general, the receivers of the taxes which are not in farm, the
court-bankers, etc. make the greater part of those who advance their
money in all public exigencies. Such people are commonly men of mean
birth, but of great wealth, and frequently of great pride. They are too
proud to marry their equals, and women of quality disdain to marry
them. They frequently resolve, therefore, to live bachelors; and having
neither any families of their own, nor much regard for those of their
relations, whom they are not always very fond of acknowledging, they
desire only to live in splendour during their own time, and are not
unwilling that their fortune should end with themselves. The number of
rich people, besides, who are either averse to marry, or whose condition
of life renders it either improper or inconvenient for them to do so, is
much greater in France than in England. To such people, who have
little or no care for posterity, nothing can be more convenient than to
exchange their capital for a revenue, which is to last just as long, and
no longer, than they wish it to do.

The ordinary expense of the greater part of modern governments, in time
of peace, being equal, or nearly equal, to their ordinary revenue, when
war comes, they are both unwilling and unable to increase their revenue
in proportion to the increase of their expense. They are unwilling, for
fear of offending the people, who, by so great and so sudden an increase
of taxes, would soon be disgusted with the war; and they are unable,
from not well knowing what taxes would be sufficient to produce the
revenue wanted. The facility of borrowing delivers them from the
embarrassment which this fear and inability would otherwise occasion. By
means of borrowing, they are enabled, with a very moderate increase of
taxes, to raise, from year to year, money sufficient for carrying on the
war; and by the practice of perpetual funding, they are enabled, with
the smallest possible increase of taxes, to raise annually the largest
possible sum of money. In great empires, the people who live in the
capital, and in the provinces remote from the scene of action, feel,
many of them, scarce any inconveniency from the war, but enjoy, at their
ease, the amusement of reading in the newspapers the exploits of their
own fleets and armies. To them this amusement compensates the small
difference between the taxes which they pay on account of the war, and
those which they had been accustomed to pay in time of peace. They are
commonly dissatisfied with the return of peace, which puts an end to
their amusement, and to a thousand visionary hopes of conquest and
national glory, from a longer continuance of the war.

The return of peace, indeed, seldom relieves them from the greater
part of the taxes imposed during the war. These are mortgaged for the
interest of the debt contracted, in order to carry it on. If, over
and above paying the interest of this debt, and defraying the ordinary
expense of government, the old revenue, together with the new taxes,
produce some surplus revenue, it may, perhaps, be converted into a
sinking fund for paying off the debt. But, in the first place, this
sinking fund, even supposing it should be applied to no other purpose,
is generally altogether inadequate for paying, in the course of any
period during which it can reasonably be expected that peace should
continue, the whole debt contracted during the war; and, in the second
place, this fund is almost always applied to other purposes.

The new taxes were imposed for the sole purpose of paying the interest
of the money borrowed upon them. If they produce more, it is generally
something which was neither intended nor expected, and is, therefore,
seldom very considerable. Sinking funds have generally arisen, not so
much from any surplus of the taxes which was over and above what was
necessary for paying the interest or annuity originally charged upon
them, as from a subsequent reduction of that interest; that of Holland
in 1655, and that of the ecclesiastical state in 1685, were both formed
in this manner. Hence the usual insufficiency of such funds.

During the most profound peace, various events occur, which require an
extraordinary expense; and government finds it always more convenient to
defray this expense by misapplying the sinking fund, than by imposing a
new tax. Every new tax is immediately felt more or less by the people.
It occasions always some murmur, and meets with some opposition. The
more taxes may have been multiplied, the higher they may have been
raised upon every different subject of taxation; the more loudly the
people complain of every new tax, the more difficult it becomes, too,
either to find out new subjects of taxation, or to raise much higher
the taxes already imposed upon the old. A momentary suspension of the
payment of debt is not immediately felt by the people, and occasions
neither murmur nor complaint. To borrow of the sinking fund is always
an obvious and easy expedient for getting out of the present difficulty.
The more the public debts may have been accumulated, the more necessary
it may have become to study to reduce them; the more dangerous, the more
ruinous it may be to misapply any part of the sinking fund; the less
likely is the public debt to be reduced to any considerable degree, the
more likely, the more certainly, is the sinking fund to be misapplied
towards defraying all the extraordinary expenses which occur in time of
peace. When a nation is already overburdened with taxes, nothing but the
necessities of a new war, nothing but either the animosity of national
vengeance, or the anxiety for national security, can induce the people
to submit, with tolerable patience, to a new tax. Hence the usual
misapplication of the sinking fund.

In Great Britain, from the time that we had first recourse to the
ruinous expedient of perpetual funding, the reduction of the public
debt, in time of peace, has never borne any proportion to its
accumulation in time of war. It was in the war which began in 1668, and
was concluded by the treaty of Ryswick, in 1697, that the foundation of
the present enormous debt of Great Britain was first laid.

On the 31st of December 1697, the public debts of Great Britain, funded
and unfunded, amounted to 21,515,742:13:8. A great part of those
debts had been contracted upon short anticipations, and some part upon
annuities for lives; so that, before the 31st of December 1701, in less
than four years, there had partly been paid off; and partly reverted
to the public, the sum of 5,121,041:12:0d; a greater reduction of the
public debt than has ever since been brought about in so short a
period of time. The remaining debt, therefore, amounted only to

In the war which began in 1702, and which was concluded by the treaty
of Utrecht, the public debts were still more accumulated. On the 31st of
December 1714, they amounted to 53,681,076:5:6. The subscription
into the South-sea fund, of the short and long annuities, increased the
capital of the public debt; so that, on the 31st of December 1722, it
amounted to 55,282,978:1:3 5/6. The reduction of the debt began in
1723, and went on so slowly, that, on the 31st of December 1739, during
seventeen years-of profound peace, the whole sum paid off was no more
than 8,328,554:17:11 3/12, the capital of the public debt, at that
time, amounting to 46,954,623:3:4 7/12.

The Spanish war, which began in 1739, and the French war which soon
followed it, occasioned a further increase of the debt, which, on the
31st of December 1748, after the war had been concluded by the treaty of
Aix-la-Chapelle, amounted to 78,293,313:1:10. The most profound peace,
of 17 years continuance, had taken no more than 8,328,354, 17:11 from
it. A war, of less than nine years continuance, added 31,338,689:18: 6
1/6 to it. {See James Postlethwaite's History of the Public Revenue.}

During the administration of Mr. Pelham, the interest of the public debt
was reduced, or at least measures were taken for reducing it, from four
to three per cent.; the sinking fund was increased, and some part of the
public debt was paid off. In 1755, before the breaking out of the late
war, the funded debt of Great Britain amounted to 72,289,675. On the
5th of January 1763, at the conclusion of the peace, the funded debt
amounted debt to 122,603,336:8:2. The unfunded debt has been stated at
13,927,589:2:2. But the expense occasioned by the war did not end with
the conclusion of the peace; so that, though on the 5th of January
1764, the funded debt was increased (partly by a new loan, and partly by
funding a part of the unfunded debt) to 129,586,789:10:1, there still
remained (according to the very well informed author of Considerations
on the Trade and Finances of Great Britain) an unfunded debt, which was
brought to account in that and the following year, of 9,975,017: 12:2
15/44d. In 1764, therefore, the public debt of Great Britain, funded
and unfunded together, amounted, according to this author, to
139,561,807:2:4. The annuities for lives, too, which had been granted
as premiums to the subscribers to the new loans in 1757, estimated at
fourteen years purchase, were valued at 472,500; and the annuities for
long terms of years, granted as premiums likewise, in 1761 and 1762,
estimated at twenty-seven and a-half years purchase, were valued at
6,826,875. During a peace of about seven years continuance, the prudent
and truly patriotic administration of Mr. Pelham was not able to pay
off an old debt of six millions. During a war of nearly the same
continuance, a new debt of more than seventy-five millions was

On the 5th of January 1775, the funded debt of Great Britain amounted to
124,996,086, 1:6d. The unfunded, exclusive of a large civil-list debt,
to 4,150,236:3:11 7/8. Both together, to 129,146,322:5:6. According to
this account, the whole debt paid off, during eleven years of profound
peace, amounted only to 10,415,476:16:9 7/8. Even this small reduction
of debt, however, has not been all made from the savings out of the
ordinary revenue of the state. Several extraneous sums, altogether
independent of that ordinary revenue, have contributed towards it.
Amongst these we may reckon an additional shilling in the pound land
tax, for three years; the two millions received from the East-India
company, as indemnification for their territorial acquisitions; and
the one hundred and ten thousand pounds received from the bank for the
renewal of their charter. To these must be added several other sums,
which, as they arose out of the late war, ought perhaps to be considered
as deductions from the expenses of it. The principal are,

The produce of French prizes.............. 690,449: 18: 9
Composition for French prisoners......... 670,000: 0: 0

What has been received from the sale
of the ceded islands......................... 95,500: 0: 0

Total, .....................................1,455,949: 18: 9

If we add to this sum the balance of the earl of Chatham's and Mr.
Calcraft's accounts, and other army savings of the same kind, together
with what has been received from the bank, the East-India company, and
the additional shilling in the pound land tax, the whole must be a good
deal more than five millions. The debt, therefore, which, since the
peace, has been paid out of the savings from the ordinary revenue of
the state, has not, one year with another, amounted to half a million
a-year. The sinking fund has, no doubt, been considerably augmented
since the peace, by the debt which had been paid off, by the reduction
of the redeemable four per cents to three per cents, and by the
annuities for lives which have fallen in; and, if peace were to
continue, a million, perhaps, might now be annually spared out of it
towards the discharge of the debt. Another million, accordingly,
was paid in the course of last year; but at the same time, a large
civil-list debt was left unpaid, and we are now involved in a new war,
which, in its progress, may prove as expensive as any of our former
wars. {It has proved more expensive than any one of our former wars, and
has involved us in an additional debt of more than one hundred millions.
During a profound peace of eleven years, little more than ten millions
of debt was paid; during a war of seven years, more than one hundred
millions was contracted.} The new debt which will probably be contracted
before the end of the next campaign, may, perhaps, be nearly equal to
all the old debt which has been paid off from the savings out of the
ordinary revenue of the state. It would be altogether chimerical,
therefore, to expect that the public debt should ever be completely
discharged, by any savings which are likely to be made from that
ordinary revenue as it stands at present.

The public funds of the different indebted nations of Europe,
particularly those of England, have, by one author, been represented as
the accumulation of a great capital, superadded to the other capital of
the country, by means of which its trade is extended, its manufactures
are multiplied, and its lands cultivated and improved, much beyond what
they could have been by means of that other capital only. He does
not consider that the capital which the first creditors of the public
advanced to government, was, from the moment in which he advanced it, a
certain portion of the annual produce, turned away from serving in the
function of a capital, to serve in that of a revenue; from maintaining
productive labourers, to maintain unproductive ones, and to be spent and
wasted, generally in the course of the year, without even the hope of
any future reproduction. In return for the capital which they advanced,
they obtained, indeed, an annuity of the public funds, in most cases,
of more than equal value. This annuity, no doubt, replaced to them their
capital, and enabled them to carry on their trade and business to the
same, or, perhaps, to a greater extent than before; that is, they were
enabled, either to borrow of other people a new capital, upon the
credit of this annuity or, by selling it, to get from other people a
new capital of their own, equal, or superior, to that which they had
advanced to government. This new capital, however, which they in this
manner either bought or borrowed of other people, must have existed in
the country before, and must have been employed, as all capitals are, in
maintaining productive labour. When it came into the hands of those who
had advanced their money to government, though it was, in some respects,
a new capital to them, it was not so to the country, but was only
a capital withdrawn from certain employments, in order to be turned
towards others. Though it replaced to them what they had advanced to
government, it did not replace it to the country. Had they not advanced
this capital to government, there would have been in the country two
capitals, two portions of the annual produce, instead of one, employed
in maintaining productive labour.

When, for defraying the expense of government, a revenue is raised
within the year, from the produce of free or unmortgaged taxes, a
certain portion of the revenue of private people is only turned away
from maintaining one species of unproductive labour, towards maintaining
another. Some part of what they pay in those taxes, might, no doubt,
have been accumulated into capital, and consequently employed in
maintaining productive labour; but the greater part would probably
have been spent, and consequently employed in maintaining unproductive
labour. The public expense, however, when defrayed in this manner, no
doubt hinders, more or less, the further accumulation of new
capital; but it does not necessarily occasion the destruction of any
actually-existing capital.

When the public expense is defrayed by funding, it is defrayed by the
annual destruction of some capital which had before existed in the
country; by the perversion of some portion of the annual produce which
had before been destined for the maintenance of productive labour,
towards that of unproductive labour. As in this case, however, the taxes
are lighter than they would have been, had a revenue sufficient for
defraying the same expense been raised within the year; the private
revenue of individuals is necessarily less burdened, and consequently
their ability to save and accumulate some part of that revenue into
capital, is a good deal less impaired. If the method of funding destroys
more old capital, it, at the same time, hinders less the accumulation or
acquisition of new capital, than that of defraying the public expense
by a revenue raised within the year. Under the system of funding, the
frugality and industry of private people can more easily repair the
breaches which the waste and extravagance of government may occasionally
make in the general capital of the society.

It is only during the continuance of war, however, that the system of
funding has this advantage over the other system. Were the expense of
war to be defrayed always by a revenue raised within the year, the taxes
from which that extraordinary revenue was drawn would last no longer
than the war. The ability of private people to accumulate, though less
during the war, would have been greater during the peace, than under
the system of funding. War would not necessarily have occasioned the
destruction of any old capitals, and peace would have occasioned the
accumulation of many more new. Wars would, in general, be more speedily
concluded, and less wantonly undertaken. The people feeling, during
continuance of war, the complete burden of it, would soon grow weary
of it; and government, in order to humour them, would not be under the
necessity of carrying it on longer than it was necessary to do so. The
foresight of the heavy and unavoidable burdens of war would hinder the
people from wantonly calling for it when there was no real or solid
interest to fight for. The seasons during which the ability of private
people to accumulate was somewhat impaired, would occur more rarely,
and be of shorter continuance. Those, on the contrary, during which that
ability was in the highest vigour would be of much longer duration than
they can well be under the system of funding.

When funding, besides, has made a certain progress, the multiplication
of taxes which it brings along with it, sometimes impairs as much the
ability of private people to accumulate, even in time of peace, as the
other system would in time of war. The peace revenue of Great Britain
amounts at present to more than ten millions a-year. If free and
unmortgaged, it might be sufficient, with proper management, and without
contracting a shilling of new debt, to carry on the most vigorous war.
The private revenue of the inhabitants of Great Britain is at present as
much incumbered in time of peace, their ability to accumulate is as much
impaired, as it would have been in the time of the most expensive war,
had the pernicious system of funding never been adopted.

In the payment of the interest of the public debt, it has been said, it
is the right hand which pays the left. The money does not go out of the
country. It is only a part of the revenue of one set of the inhabitants
which is transferred to another; and the nation is not a farthing the
poorer. This apology is founded altogether in the sophistry of the
mercantile system; and, after the long examination which I have already
bestowed upon that system, it may, perhaps, be unnecessary to say
anything further about it. It supposes, besides, that the whole public
debt is owing to the inhabitants of the country, which happens not to be
true; the Dutch, as well as several other foreign nations, having a very
considerable share in our public funds. But though the whole debt
were owing to the inhabitants of the country, it would not, upon that
account, be less pernicious.

Land and capital stock are the two original sources of all revenue, both
private and public. Capital stock pays the wages of productive labour,
whether employed in agriculture, manufactures, or commerce. The
management of those two original sources of revenue belongs to two
different sets of people; the proprietors of land, and the owners or
employers of capital stock.

The proprietor of land is interested, for the sake of his own revenue,
to keep his estate in as good condition as he can, by building and
repairing his tenants houses, by making and maintaining the necessary
drains and inclosures, and all those other expensive improvements
which it properly belongs to the landlord to make and maintain. But,
by different land taxes, the revenue of the landlord may be so
much diminished, and, by different duties upon the necessaries and
conveniencies of life, that diminished revenue may be rendered of so
little real value, that he may find himself altogether unable to make
or maintain those expensive improvements. When the landlord, however,
ceases to do his part, it is altogether impossible that the tenant
should continue to do his. As the distress of the landlord increases,
the agriculture of the country must necessarily decline.

When, by different taxes upon the necessaries and conveniencies of life,
the owners and employers of capital stock find, that whatever revenue
they derive from it, will not, in a particular country, purchase the
same quantity of those necessaries and conveniencies which an equal
revenue would in almost any other, they will be disposed to remove to
some other. And when, in order to raise those taxes, all or the greater
part of merchants and manufacturers, that is, all or the greater part of
the employers of great capitals, come to be continually exposed to the
mortifying and vexatious visits of the tax-gatherers, this disposition
to remove will soon be changed into an actual removing. The industry of
the country will necessarily fall with the removal of the capital which
supported it, and the ruin of trade and manufactures will follow the
declension of agriculture.

To transfer from the owners of those two great sources of revenue, land,
and capital stock, from the persons immediately interested in the
good condition of every particular portion of land, and in the good
management of every particular portion of capital stock, to another set
of persons (the creditors of the public, who have no such particular
interest ), the greater part of the revenue arising from either, must,
in the long-run, occasion both the neglect of land, and the waste or
removal of capital stock. A creditor of the public has, no doubt, a
general interest in the prosperity of the agriculture, manufactures, and
commerce of the country; and consequently in the good condition of its
land, and in the good management of its capital stock. Should there be
any general failure or declension in any of these things, the produce of
the different taxes might no longer be sufficient to pay him the
annuity or interest which is due to him. But a creditor of the public,
considered merely as such, has no interest in the good condition of any
particular portion of land, or in the good management of any particular
portion of capital stock. As a creditor of the public, he has no
knowledge of any such particular portion. He has no inspection of it. He
can have no care about it. Its ruin may in some cases be unknown to him,
and cannot directly affect him.

The practice of funding has gradually enfeebled every state which has
adopted it. The Italian republics seem to have begun it. Genoa and
Venice, the only two remaining which can pretend to an independent
existence, have both been enfeebled by it. Spain seems to have learned
the practice from the Italian republics, and (its taxes being probably
less judicious than theirs) it has, in proportion to its natural
strength, been-still more enfeebled. The debts of Spain are of very old
standing. It was deeply in debt before the end of the sixteenth
century, about a hundred years before England owed a shilling.
France, notwithstanding all its natural resources, languishes under an
oppressive load of the same kind. The republic of the United Provinces
is as much enfeebled by its debts as either Genoa or Venice. Is it
likely that, in Great Britain alone, a practice, which has brought
either weakness or dissolution into every other country, should prove
altogether innocent?

The system of taxation established in those different countries, it
may be said, is inferior to that of England. I believe it is so. But it
ought to be remembered, that when the wisest government has exhausted
all the proper subjects of taxation, it must, in cases of urgent
necessity, have recourse to improper ones. The wise republic of Holland
has, upon some occasions, been obliged to have recourse to taxes as
inconvenient as the greater part of those of Spain. Another war, begun
before any considerable liberation of the public revenue had been
brought about, and growing in its progress as expensive as the last war,
may, from irresistible necessity, render the British system of taxation
as oppressive as that of Holland, or even as that of Spain. To the
honour of our present system of taxation, indeed, it has hitherto given
so little embarrassment to industry, that, during the course even of the
most expensive wars, the frugality and good conduct of individuals
seem to have been able, by saving and accumulation, to repair all the
breaches which the waste and extravagance of government had made in the
general capital of the society. At the conclusion of the late war, the
most expensive that Great Britain ever waged, her agriculture was as
flourishing, her manufacturers as numerous and as fully employed, and
her commerce as extensive, as they had ever been before. The capital,
therefore, which supported all those different branches of industry,
must have been equal to what it had ever been before. Since the peace,
agriculture has been still further improved; the rents of houses
have risen in every town and village of the country, a proof of the
increasing wealth and revenue of the people; and the annual amount of
the greater part of the old taxes, of the principal branches of the
excise and customs, in particular, has been continually increasing, an
equally clear proof of an increasing consumption, and consequently of
an increasing produce, which could alone support that consumption. Great
Britain seems to support with ease, a burden which, half a century ago,
nobody believed her capable of supporting, Let us not, however, upon
this account, rashly conclude that she is capable of supporting any
burden; nor even be too confident that she could support, without great
distress, a burden a little greater than what has already been laid upon

When national debts have once been accumulated to a certain degree,
there is scarce, I believe, a single instance of their having been
fairly and completely paid. The liberation of the public revenue, if it
has ever been brought about at all, has always been brought about by a
bankruptcy; sometimes by an avowed one, though frequently by a pretended

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