Book V, Chapter II, 1

On the Sources of the General or Public Revenue of Society.

The revenue that must cover not only the expense of defending society and maintaining the dignity of its chief magistrate, but all the other necessary expenses of government for which the constitution of the state has made no particular provision, may be drawn from either of two sources: first, a fund belonging especially to the sovereign or commonwealth, independent of the people's revenue; or second, the revenue of the people.

Part I. On the Funds, or Sources of Revenue, That May Belong Especially to the Sovereign or Commonwealth.

The funds, or sources of revenue, that may belong especially to the sovereign or commonwealth must consist either of stock or of land.

Like any other owner of stock, the sovereign may obtain revenue from it by employing it himself or by lending it. In the first case his revenue is profit; in the second, interest.

The revenue of a Tartar or Arabian chief consists of profit. It arises chiefly from the milk and increase of his own herds and flocks, whose management he supervises himself, as the principal shepherd or herdsman of his own horde or tribe. Only in this earliest and least developed condition of civil government, however, has profit ever formed the chief part of the public revenue of a monarchy.

Small republics have sometimes drawn considerable revenue from the profits of commercial ventures. The republic of Hamburgh is said to do so from a public wine cellar and apothecary's shop. [See Memoires concernant les Droits et Impositions en Europe, tome i. page 73. This work was compiled by order of the court for a commission that had spent several years considering suitable means of reforming the finances of France. Its account of French taxes, occupying three quarto volumes, may be regarded as perfectly authentic. Its account of the taxes of other European nations was compiled from whatever information French ministers at the various courts could obtain. It is much shorter and probably not quite so accurate as the account of French taxes.] A state can hardly be very great if its sovereign has leisure to trade as a wine merchant or apothecary. The profit of a public bank has furnished revenue to more considerable states: not only Hamburgh but Venice and Amsterdam. Some have even thought such revenue worthy of the attention of an empire as great as Great Britain. If the ordinary dividend of the bank of England is reckoned at five and a-half per cent., and its capital at ten millions seven hundred and eighty thousand pounds, its net annual profit after management expenses, it is said, must amount to five hundred and ninety-two thousand nine hundred pounds. The government, it is claimed, could borrow that capital at three per cent. interest and, by managing the bank itself, make a clear profit of two hundred and sixty-nine thousand five hundred pounds a year. Experience suggests that the orderly, watchful, and thrifty administration of aristocracies such as Venice and Amsterdam is admirably suited to managing such a commercial venture. But whether England's government could safely be trusted with it is considerably more doubtful. Whatever its virtues, that government has never been renowned for thrift: in peace it has generally displayed the idle and negligent extravagance perhaps natural to monarchies, and in war it has invariably shown all the heedless extravagance into which democracies tend to fall.

The post office is properly a commercial venture. Government advances the cost of establishing the several offices and buying or hiring the necessary horses or carriages, and recovers that cost, with a large profit, from charges on what is carried. It is perhaps the only commercial venture successfully managed by, I believe, every kind of government. The capital required is not very large. The business holds no mysteries. Its returns are not only certain but immediate.

Princes, however, have frequently undertaken other commercial ventures, hoping, like private individuals, to improve their fortunes by entering ordinary branches of trade. They have hardly ever succeeded. The extravagance with which princely affairs are always conducted makes success almost impossible. A prince's agents regard their master's wealth as inexhaustible. They pay little heed to the price at which they buy or sell, or to the cost of transporting his goods from place to place. They often live as extravagantly as princes themselves; and sometimes, despite that extravagance, they acquire princely fortunes through a suitable way of drawing up their accounts. Machiavel tells us that the agents of Lorenzo of Medicis, a prince of no small ability, conducted his trade in just this way. The republic of Florence had several times to pay the debts their extravagance had incurred on his behalf. Accordingly, he found it best to give up the merchant's business, to which his family originally owed its fortune, and to devote both what remained of that fortune and the state revenue at his disposal, in the latter part of his life, to ventures and expenses more fitting to his position.

No two roles seem less compatible than trader and sovereign. If the trading spirit of the English East India company makes them very bad sovereigns, the spirit of sovereignty seems to have made them equally bad traders. When they were traders alone, they conducted their trade successfully and could pay the owners of their stock a moderate dividend from its profits. Since becoming sovereigns, with a revenue originally said to exceed three millions sterling, they have had to beg the customary assistance of government to avoid immediate bankruptcy. In their former position, their servants in India thought of themselves as merchants' clerks; in their present one, they think of themselves as ministers of sovereigns.

A state may sometimes derive part of its public revenue from interest on money as well as from profits on stock. If it has accumulated a treasure, it may lend part of it to foreign states or to its own subjects.

The canton of Berne earns considerable revenue by lending part of its treasure to foreign states—that is, by investing it in the public funds of various indebted European nations, chiefly France and England. The security of this revenue depends, first, on the security of the funds in which it is invested, or the good faith of the government managing them; and second, on the certainty or likelihood of continued peace with the debtor nation. In wartime, that nation's very first hostile act might be to confiscate the funds belonging to its creditor. So far as I know, this policy of lending to foreign states is peculiar to the canton of Berne.

The city of Hamburgh [See Memoire concernant les Droites et Impositions en Europe tome i p. 73.] has established a kind of public pawnshop, which lends money to the state's subjects against pledges at six per cent. interest. This pawnshop, or lombard, is said to bring the state a revenue of a hundred and fifty thousand crowns, amounting, at four and sixpence per crown, to £33,750 sterling.

Without accumulating any treasure, the government of Pennsylvania devised a way to lend its subjects not money itself, but its equivalent. It issued private individuals interest-bearing paper bills of credit, secured on land worth twice their value, redeemable fifteen years after their date and meanwhile transferable from hand to hand like banknotes. An act of assembly declared them legal tender for all payments between inhabitants of the province. In this way it raised a moderate revenue that went far toward meeting an annual expense of about £4,500—the entire ordinary expense of that thrifty and orderly government. The success of such a measure must have depended on three circumstances: first, a demand for an instrument of commerce besides gold and silver money, or for so much consumable stock that obtaining it would otherwise require sending abroad most of their gold and silver money; second, the good credit of the government employing the measure; and third, restraint in its use, so that the total value of the paper bills of credit never exceeded the gold and silver money that would have been needed for circulation in their absence. Several other American colonies adopted the same expedient at various times. Lacking this restraint, however, most of them found it caused far more disorder than convenience.

The unstable and perishable character of stock and credit, however, makes them unsuitable as the principal funds for the secure, steady, permanent revenue that alone can give government security and dignity. No great nation beyond the pastoral condition seems ever to have drawn most of its public revenue from these sources.

Land is a more stable and permanent fund. Accordingly, the rent of public lands has been the principal source of public revenue for many a great nation far advanced beyond the pastoral condition. For a long time the ancient republics of Greece and Italy drew most of the revenue that paid the necessary expenses of the commonwealth from the produce or rent of public lands. The rent of crown lands long made up the greater part of the revenue of Europe's ancient sovereigns.

War and preparation for war are the two circumstances responsible for most of the necessary expense of all great states in modern times. But in the ancient republics of Greece and Italy, every citizen was a soldier who both served and prepared for service at his own expense. Neither circumstance, therefore, could impose any great expense on the state. The rent of a fairly modest landed estate might fully cover all the other necessary expenses of government.

In the ancient monarchies of Europe, contemporary manners and customs adequately prepared the mass of the people for war; and when they took the field, the terms of their feudal tenures required them to be maintained either at their own expense or at that of their immediate lords, without imposing a new charge on the sovereign. Most other government expenses were very moderate. The administration of justice, as has been shown, produced revenue instead of expense. Three days of country people's labor before harvest and three days after it were considered sufficient to make and maintain all the bridges, highways, and other public works thought necessary for the country's commerce. In those days the sovereign's main expense seems to have been maintaining his own family and household. Accordingly, the officers of his household were then the great officers of state. The lord treasurer collected his rents. The lord steward and lord chamberlain oversaw the expenses of his family. Care of his stables belonged to the lord constable and lord marshal. All his houses were built as castles, and seem to have been his principal fortresses. Their keepers might be regarded as a kind of military governor; they seem to have been the only military officers who needed maintaining in peacetime. Under these circumstances, the rent of a great landed estate could ordinarily cover all the necessary expenses of government.

In most civilized European monarchies today, the rent of all the country's land, if managed as it probably would be under a single owner, would perhaps scarcely equal the ordinary revenue they levy from the people even in peacetime. Great Britain's ordinary revenue, for example, exceeds ten millions a year. It covers not only current annual expenses, but interest on the public debts and the repayment of part of their principal. Yet the land tax at four shillings in the pound brings in less than two millions a year. This so-called land tax, however, is supposed to represent one-fifth of the rent not only of all land but also of all houses, and of the interest on all the capital stock of Great Britain, except stock lent to the public or used as farming stock in cultivating land. A considerable share of its proceeds comes from house rent and interest on capital stock. At four shillings in the pound, for example, the land tax on the city of London amounts to £123,399: 6: 7; on the city of Westminster, £63,092: 1: 5; and on the palaces of Whitehall and St. James's, £30,754: 6: 3. All the kingdom's other incorporated cities and towns are likewise assessed for a share of the land tax, arising almost entirely from house rents or the presumed interest on trading and capital stock. Thus, by the valuation used to assess Great Britain's land tax, all revenue from rents of land and houses and interest on capital stock—except stock lent to the public or employed in cultivation—amounts to no more than ten millions sterling a year, the ordinary revenue government levies on the people even in peacetime. The valuation on which Great Britain's land tax is based is undoubtedly far below the real value across the kingdom as a whole, although in some particular counties and districts it is said to be nearly equal to it. Many have estimated the rent of land alone, apart from house rents and interest on stock, at twenty millions. That estimate is largely a guess, and I suspect it is as likely to be too high as too low. But if Great Britain's lands in their present state of cultivation yield no more than twenty millions a year in rent, they could hardly yield half that rent, and most probably not a fourth of it, if they all belonged to one owner and fell under the negligent, costly, oppressive management of his factors and agents. Great Britain's crown lands now yield less than a fourth of the rent they could probably yield under private ownership. If those crown lands were more extensive, they would probably be managed still worse.

On the Sources of Society’s General or Public Revenue

The government needs revenue to pay for defending society, supporting the chief magistrate’s position, and meeting all its other necessary expenses for which the state’s constitution provides no separate revenue. This revenue can come from two places. First, it can come from a fund belonging specifically to the sovereign or commonwealth, independent of the people’s revenue. Second, it can come from the people’s revenue.

Part I. Funds or Sources of Revenue Belonging Specifically to the Sovereign or Commonwealth

The funds that belong specifically to the sovereign or commonwealth must be either stock or land.

Like anyone else who owns stock, a sovereign can earn revenue from it by using it himself or by lending it out. In the first case the revenue is profit; in the second it is interest.

A Tartar or Arabian chief gets his revenue from profit. It comes mainly from the milk and increase of his own herds and flocks. He oversees them himself and is the main shepherd or herdsman of his own horde or tribe. Only in this earliest and least developed form of civil government, however, has profit ever supplied most of the public revenue of a monarchy.

Small republics have sometimes earned substantial revenue from profits on commercial ventures. The republic of Hamburgh is said to earn revenue from a public wine cellar and apothecary’s shop. [See Memoires concernant les Droits et Impositions en Europe, tome i. page 73. This work was compiled by order of the court for a commission that had spent several years considering how to reform France’s finances. Its account of French taxes fills three quarto volumes and can be regarded as entirely reliable. Its account of other European nations’ taxes was compiled from information that French ministers at the various courts could obtain. It is much shorter and probably less exact than the account of French taxes.] A state cannot be very large if its sovereign has time to operate as a wine merchant or apothecary. Public banks have provided revenue to larger states: not just Hamburgh, but Venice and Amsterdam as well. Some people have even thought this kind of revenue worthy of an empire as large as Great Britain. Suppose the bank of England pays its usual dividend of five and a-half per cent. on capital of ten millions seven hundred and eighty thousand pounds. After management expenses, its net yearly profit must, they say, be five hundred and ninety-two thousand nine hundred pounds. They claim the government could borrow that capital at three per cent. interest. By managing the bank itself, it could then make a clear profit of two hundred and sixty-nine thousand five hundred pounds a year. Experience shows that aristocracies such as Venice and Amsterdam, with their orderly, watchful, and thrifty administrations, are well suited to managing this kind of commercial venture. But England’s government is another matter. Whatever its virtues, it has never been known for economy. In peacetime it has generally spent with the lazy carelessness perhaps natural to monarchies. In wartime it has consistently shown all the unthinking extravagance that democracies can fall into. Whether it could safely be trusted to manage such a venture is therefore much more doubtful.

The post office is really a commercial venture. The government pays to establish its offices and to buy or hire the necessary horses and carriages. Charges on the items carried repay those costs with a large profit. It may be the only commercial venture successfully managed, I believe, by every kind of government. The capital required is not very large. The business is straightforward, and its returns are both certain and immediate.

Princes have often gone into other commercial ventures. Like private individuals, they have hoped to improve their fortunes by investing in ordinary lines of trade. They have hardly ever succeeded. The lavish way princes’ affairs are always managed makes success almost impossible. A prince’s agents think their master’s wealth cannot run out. They pay little attention to the price at which they buy or sell, or to the cost of moving his goods. The agents often live as lavishly as princes themselves. Sometimes, despite that spending, they also acquire princely fortunes by the way they draw up their accounts. According to Machiavel, the agents of Lorenzo of Medicis—no incapable prince—ran his trade this way. The republic of Florence had to pay the debts their extravagance caused him on several occasions. He therefore found it best to give up trading, the business to which his family had originally owed its fortune. Late in life he used both the rest of that fortune and the state revenue under his control for projects and expenses more suitable to his position.

The roles of trader and sovereign could hardly be more at odds. If the English East India company’s trading outlook makes it a very bad sovereign, its outlook as a sovereign seems to have made it just as bad a trader. When its members were only traders, they managed their trade successfully and could pay a modest dividend to the owners of its stock from their profits. Since becoming sovereigns, they have reportedly had revenue that originally exceeded three millions sterling. Yet they have had to ask the government for its usual assistance to avoid immediate bankruptcy. Previously their servants in India thought of themselves as merchants’ clerks. Now they think of themselves as sovereigns’ ministers.

A state may get some public revenue from interest on money as well as profit on stock. If it has built up a treasury, it can lend part of it either to foreign states or to its own subjects.

The canton of Berne earns considerable revenue by lending part of its treasury to foreign states. It invests in the public funds of indebted European nations, mainly France and England. The security of this income depends first on the security of those funds, or the honesty of the governments that manage them. It depends second on whether peace with the debtor nation will continue. In a war, that nation’s very first hostile act might be to confiscate the funds it owes its creditor. As far as I know, Berne alone follows this policy of lending to foreign states.

The city of Hamburgh [See Memoire concernant les Droites et Impositions en Europe tome i p. 73.] has established a kind of public pawnshop. It lends to its subjects against pledged goods at six per cent. interest. This pawnshop, called a lombard, supposedly earns the state a hundred and fifty thousand crowns. At four and sixpence per crown, that comes to £33,750 sterling.

Pennsylvania’s government found a way to lend its subjects something equivalent to money without accumulating a treasury. It issued paper bills of credit to private individuals at interest, secured by land worth twice the advance. The bills were to be redeemed fifteen years after issue. Meanwhile, people could pass them from hand to hand like banknotes, and an act of assembly made them legal tender for all payments between residents of the province. This brought in a modest revenue. It paid a substantial share of about £4,500 in annual expenses, the entire regular expense of that frugal, orderly government. The success of this measure depended on three things. First, there had to be a demand for a trading instrument besides gold and silver money. Alternatively, people had to want so much consumable stock that they could obtain it only by sending most of their gold and silver abroad to buy it. Second, the issuing government needed good credit. Third, it had to use the measure with restraint. The total value of its paper bills could never exceed the gold and silver money needed to keep trade circulating if there had been no bills. Several other American colonies adopted the same measure on various occasions. But because they lacked this restraint, it caused much more disorder than convenience in most of them.

Stock and credit are unstable and can disappear. They cannot be relied on as the main sources of the secure, steady, lasting revenue that alone gives government security and dignity. No great nation beyond the shepherd stage seems ever to have drawn most of its public revenue from them.

Land is a more stable and lasting source. Accordingly, rents from public lands have supplied most of the public revenue of many great nations well beyond the shepherd stage. For a long time the ancient republics of Greece and Italy paid most of their necessary public expenses from the produce or rent of public lands. The rents of crown lands likewise supplied most of the revenue of Europe’s early sovereigns for a long time.

In modern times, war and preparing for war cause most of the necessary expenses of all great states. But in the ancient republics of Greece and Italy every citizen was a soldier and paid for his own service and preparation. Neither war nor preparation therefore cost the state very much. Rent from a fairly modest estate could easily pay for all the other necessary government expenses.

In Europe’s early monarchies, the customs of the time adequately prepared most people for war. When they went into the field, the terms of their feudal holdings required them to support themselves or be supported by their immediate lords. The sovereign faced no new charge. Most other government expenses were modest. As already shown, the administration of justice brought in revenue instead of costing money. People thought that requiring country workers to labor for three days before and three days after harvest provided enough to build and maintain all the bridges, highways, and other public works that trade needed. The sovereign’s main expense then seems to have been supporting his own family and household. So his household officers were the chief officers of state. The lord treasurer collected his rents. The lord steward and lord chamberlain managed his family expenses. The lord constable and lord marshal looked after his stables. His houses were built as castles and seem to have been his principal fortresses. Their keepers could be regarded as military governors, apparently the only military officers he needed to maintain in peacetime. Under these conditions, rent from a large estate could normally cover all necessary government expenses.

Today, in most of Europe’s civilized monarchies, even the rent from every piece of land in the country might hardly equal the regular revenue collected from the people in peacetime. That is especially so if one owner held all the land and managed it as such an owner probably would. Great Britain’s regular revenue, for example, exceeds ten millions a year. It pays current yearly expenses, interest on public debts, and part of the principal of those debts. Yet its land tax, at four shillings in the pound, brings in less than two millions a year. This so-called land tax is supposed to equal one-fifth not just of all land rents, but also of all house rents and the interest on all capital stock in Great Britain. The exceptions are stock lent to the public and farming stock used to cultivate land. A considerable share of the tax actually comes from house rents and interest on capital stock. For example, the land tax on the city of London at four shillings in the pound comes to £123,399: 6: 7; that on the city of Westminster to £63,092: 1: 5; and that on the palaces of Whitehall and St. James’s to £30,754: 6: 3. Every other incorporated city and town in the kingdom is also assessed for a share of this tax. Almost all of those payments come from house rents or the supposed interest on trading and capital stock. By the values used to assess Great Britain’s land tax, then, the combined revenue from all land rents, all house rents, and the interest on all capital stock—apart from stock lent to the public or used to cultivate land—does not exceed ten millions sterling a year. That equals the regular revenue the government collects from the people even in peacetime. The tax assessments are undoubtedly far below actual values on average across the kingdom, though reportedly close to them in some counties and districts. Many have estimated land rents alone, excluding house rents and stock interest, at twenty millions. That estimate is largely a guess and, I suspect, as likely to be too high as too low. But suppose Britain’s lands in their present state of cultivation yield no more than twenty millions a year in rent. They could probably yield less than half, and most likely less than a quarter, of that if one proprietor owned them all and put them under the negligent, costly, oppressive management of his agents. Britain’s crown lands now yield less than a quarter of the rent they could probably yield in private hands. If the crown lands were larger, they would probably be managed even worse.