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§ 1. THE question must now be considered, how far it is right or expedient to raise money for the purposes of government, not by laying on taxes to the amount required, but by taking a portion of the capital of the country in the form of a loan, and charging the public revenue with only the interest. Nothing needs be said about providing for temporary wants by taking up money; for instance, by an issue of exchequer bills, destined to be paid off, at furthest in a year or two, from the proceeds of the existing taxes. This is a convenient expedient, and when the government does not possess a treasure or hoard, is often a necessary one, on the occurrence of extraordinary expenses, or of a temporary failure in the ordinary sources of revenue. What we have to discuss is the propriety of contracting a national debt of a permanent character; defraying the expenses of a war, or of any season of difficulty, by loans, to be redeemed either very gradually and at a distant period, or not at all. This question has already been touched upon in the First Book.” We remarked, that if the capital taken in loans is V abstracted from funds either engaged in production, or destined to be employed in it, their diversion from that purpose is equivalent to taking the amount from the wages of the labouring classes. Borrowing, in this case, is not a substitute for raising the supplies within the year. A government which borrows does actually take the amount within the

* Supra, vol. i. pp. 110–14.

year, and that too by a tax exclusively on the labouring
classes: than which it could have done nothing worse, if
it had supplied its wants by avowed taxation; and in that
case the transaction, and its evils, would have ended with
the emergency; while by the circuitous mode adopted, the
value exacted from the labourers is gained, not by the state,
but by the employers of labour, the state remaining charged
with the debt besides, and with its interest in perpetuity.
The system of public loans, in such circumstances, may be
pronounced the very worst which, in the present state of
civilization, is still included in the catalogue of financial ex-
We however remarked that there are other circum-

/ stances in which loans are not chargeable with these perni

cious consequences: namely, first, when what is borrowed is foreign capital, the overflowings of the general accumulation of the world; or, secondly, when it is capital which either would not have been saved at all unless this mode of investment had been open to it, or after being saved, would

./ have been wasted in unproductive enterprises, or sent to

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seek employment in foreign countries. When the progress
of accumulation has reduced profits either to the ultimate
or to the practical minimum,_to the rate, less than which
would either put a stop to the increase of capital, or send
the whole of the new accumulations abroad; government
may annually intercept these new accumulations, without
trenching on the employment or wages of the labouring
classes in the country itself, or perhaps in any other country.
To this extent, therefore, the loan system may be carried,
without being liable to the utter and peremptory condemna-
tion which is due to it when it overpasses this limit. What
is wanted is an index to determine whether, in any given
series of years, as during the last great war for example, the
limit has been exceeded or not.
Such an index exists, at once a certain and an obvious
one. Did the government, by its loan operations, augment
the rate of interest? If it only opened a channel for capital


which would not otherwise have been accumulated, or , , , , which, if accumulated, would not have been employed within the country; this implies that the capital, which the ''' government took and expended, could not have found employment at the existing rate of interest. So long as the loans do no more than absorb this surplus, they prevent any tendency to a fall of the rate of interest, but they cannot occasion any rise. When they do raise the rate of interest, as they did in a most extraordinary degree during the French war, this is positive proof that the government is a competitor for capital with the ordinary channels of productive investment, and is carrying off, not merely funds which would not, but funds which would, have found productive employment within the country. To the full extent, therefore, to which the loans of government, during the war, caused the rate of interest to exceed what it was before, and what it has been since, those loans are chargeable with all the evils which have been described. If it be objected that interest only rose because profits rose, I reply that this does not weaken, but strengthens, the argument. If the government loans produced the rise of profits by the great amount of capital which they absorbed, by what means can they have | had this effect, unless by lowering the wages of labour? It will perhaps be said, that what kept profits high during the war was not the drafts made on the national capital by the loans, but the rapid progress of industrial improvements. This, in a great measure, was the fact; and it no doubt alleviated the hardship to the labouring classes, and made the financial system which was pursued less actively mischievous, but not less contrary to principle. These very improvements in industry, made room for a larger amount of capital; and the government, by draining away a great part of the annual accumulations, did not indeed prevent that capital from existing ultimately, (for it started into existence with great rapidity after the peace,) but prevented it from existing at the time, and subtracted just so much, while the war lasted, from distribution among productive labourers.

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If the government had abstained from taking this capital by loan, and had allowed it to reach the labourers, but had raised the supplies which it required by a direct tax on the labouring classes, it would have produced (in every respect but the expense and inconvenience of collecting the tax) the very same economical effects which it did produce, except that we should not now have had the debt. The course it actually took was therefore worse than the very worst mode which it could possibly have adopted of raising the supplies within the year: and the only excuse, or justification, which it admits of, (so far as that excuse could be truly pleaded) was hard necessity; the impossibility of raising so enormous an annual sum by taxation, without resorting to taxes which from their odiousness, or from the facility of evasion, it would have been found impracticable to enforce. When government loans are limited to the overflowings of the national capital, or to those accumulations which would not take place at all unless suffered to overflow, they are at least not liable to this grave condemnation : they occasion no privation to any one at the time, except by the payment of the interest, and may even be beneficial to the labouring class during the term of their expenditure, by employing in the direct purchase of labour, as that of soldiers, sailors, &c., funds which might otherwise have quitted the country altogether. In this case therefore the question really is, what it is commonly supposed to be in all cases, namely, a choice between a great sacrifice at once, and a small one indefinitely prolonged. On this matter it seems rational to think, that the prudence of a nation will dictate the same conduct as the prudence of an individual; to submit to as much of the privation immediately, as can easily be borne, and only when any further burthen would distress or cripple them too much, to provide for the remainder by mortgaging their future income. It is an excellent maxim to make present resources suffice for present wants; the future will have its own wants to provide for. On the other hand, it may reasonably be taken into consideration that in a

country increasing in wealth, the necessary expenses of government do not increase in the same ratio as capital or population ; any burthen, therefore, is always less and less felt : and since those extraordinary expenses of government which are fit to be incurred at all, are mostly beneficial beyond the existing generation, there is no injustice in making posterity pay a part of the price, if the inconvenience would be extreme of defraying the whole of it by the exertions and sacrifices of the generation which first incurred it.

§ 2. When a country, wisely or unwisely, has burthened itself with a debt, is it expedient to take steps for redeeming that debt? In principle it is impossible not to maintain the affirmative. It is true that the payment of the interest, when the creditors are members of the same community, is no national loss, but a mere transfer. The transfer, however, being compulsory, is a serious evil, and the raising a great extra revenue by any system of taxation necessitates so much expense, vexation, disturbance of the channels of industry, and other mischiefs over and above the mere payment of the money wanted by the government, that to get rid of the necessity of such taxation is at all times worth a considerable effort. The same amount of sacrifice which would have been worth incurring to avoid contracting the debt, it is worth while to incur, at any subsequent time, for the purpose of extinguishing it.

Two modes have been contemplated of paying off a national debt: either at once by a general contribution, or gradually by a surplus revenue. The first would be incomparably the best, if it were practicable; and it would be practicable if it could justly be done by assessment on property alone. If property bore the whole interest of the debt, property might, with great advantage to itself, pay it off; since this would be merely surrendering to a creditor the principal sum, the whole annual proceeds of which were already his by law; and would be equivalent to what a landowner does when he sells part of his estate, to free the

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