An Inquiry into the Principles of Political Oeconomy (Vol. 2 of 2) / 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

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.