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

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[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.