This was the case in England during the wars of Queen Anne.
So early as 1706, government, as has been said, began to borrow at 6 per cent. upon funds already engaged. What was the consequence? The exchequer having no money to pay the interest as it fell due, paid with tallies; these fell to great discount, and had they remained long in that discredited situation, lending would have stopt, or interest would have risen, as in France, so high as to lose the name of interest altogether. This was the case, in the example above cited, when seven millions ready money, borrowed by the late King of France, became a debt of thirty-two millions on the state.
Upon the occasion above mentioned, government availed themselves of the bank of England, as I say every private citizen should have a power to do, on every occasion, when his credit is good, though money should fail him. They engaged the bank to discount all tallies issued for interest of debts; that is, in other words, to turn those sticks into money: but as public credit was so low that money could not be found to discharge even the interest of the advance made by the bank, the government consented, that all advances of that kind should bear compound interest quarterly, at 6 per cent. What a monstrous profit to the bank! what a charge upon the state! Had banks of circulation upon mortgages been established at that time, money would have come in at a moderate simple interest to individuals, who would have availed themselves of them, for the payment of all public burdens. Instead of which, industry was made to suffer; the public money did not come in; taxation stopt; expences went on, and deficiencies were paid by the public at this monstrous charge.
On the other hand, had it not been for the assistance the bank then gave the state, in circulating those exchequer tallies, bills, &c. it is very certain that credit would have failed as totally in England as it had done in France in 1708, when Desmaretz undertook the finances. This minister had no bank to avail himself of, and accordingly he run France in debt at the rate of two hundred millions of livres per annum, during seven campaigns; of which, I am persuaded, he did not receive one half, or near it, in effective value.
What I have said will, I hope, be sufficient to shew that the only way for any state to borrow, is previously to provide a fund for making good what is agreed upon with the lenders; and that all expedients to supply the want of it will in the end bring great expence upon the people, either by involving them in an excessive burden of debts, in case public engagements should be held sacred, as has constantly been the case in Great Britain; or by driving the state to a bankruptcy, as was the case in France upon the death of the late King. I call it a bankruptcy, because all that was owing was not paid. A man who pays no more than 19s. 11¾d. in the pound, is a bankrupt, as well as he who cannot pay one farthing.
I now come to the methods of paying off debts when already contracted.
Public debts may be divided into two classes, redeemable and irredeemable. Redeemable debts may be paid off in several ways, which we shall briefly enumerate before we compare their several advantages.
First then, such debts may be paid off at once, by refunding to the creditors the whole capital, with all arrears of interest.
2do, They may be paid off yearly, according to a certain rule to determine the preference, and order of payment: for this purpose, a determinate sum must be set apart as a sinking fund.
3tio, They may be paid off cumulatively and proportionally every year, by incorporating the sinking fund into the money appropriated for discharging the interest, and by placing all that is paid beyond the interest, as payment in part of the capital.