Book V, Chapter III, 3

In England, where the seat of government is the world's greatest commercial city, merchants are generally the people who advance money to the government. They advance it not to reduce their commercial capital but to increase it; unless they expected to sell their share of a new loan subscription at some profit, they would never subscribe. But if, in return for their money, they received only life annuities rather than perpetual ones, whether based on their own lives or on others', they could not always expect to sell them at a profit. They would always sell annuities on their own lives at a loss, since nobody would pay as much for an annuity on the life of someone else, however similar that person's age and health to their own, as for one on their own life. An annuity on a third person's life is no doubt worth the same to buyer and seller; but its real value begins to decline as soon as it is granted and continues to decline ever more as long as it exists. It can therefore never be as convenient a transferable stock as a perpetual annuity, whose real value may be assumed to remain always, or almost always, the same.

In France, because the seat of government is not a great commercial city, merchants make up a smaller share of those who advance money to the government. Those engaged in finance—the farmers-general, collectors of taxes not farmed out, court bankers, etc.—provide most of the money advanced in every public emergency. Such people are commonly of humble birth but great wealth and often great pride. They are too proud to marry their equals, while women of rank disdain to marry them. They therefore often decide to remain bachelors; lacking families of their own and caring little for their relatives, whom they are not always eager to acknowledge, they seek only to live splendidly in their own time and do not mind if their fortunes end with them. Moreover, there are many more rich people in France than in England who either do not wish to marry or whose way of life makes marriage improper or inconvenient. For people with little or no concern for posterity, nothing could be more convenient than exchanging their capital for an income lasting precisely as long as they wish, and no longer.

The ordinary expenses of most modern governments in peacetime equal or nearly equal their ordinary revenue. When war begins, they are therefore both unwilling and unable to increase revenue in proportion to expenses. They are unwilling because they fear offending the people, who would soon grow disgusted with the war if taxes rose so sharply and suddenly; they are unable because they do not really know which taxes would raise the revenue needed. Easy borrowing spares them the difficulties that this fear and inability would otherwise cause. By borrowing, they can obtain enough money each year to wage war with only a modest rise in taxes; through perpetual funding they can raise the greatest possible sum annually with the smallest possible tax increase. In great empires, many who live in the capital or in provinces far from the fighting scarcely suffer any inconvenience from war. Instead they enjoy at leisure the entertainment of reading newspaper reports of their fleets' and armies' exploits. To them this entertainment makes up for the small difference between the taxes paid because of war and those they had been accustomed to paying in peace. They are commonly unhappy when peace returns, ending both their entertainment and a thousand imaginary hopes of conquest and national glory through a longer war.

Indeed, peace seldom relieves them of most taxes imposed during the war. Those taxes are mortgaged to pay interest on the debt contracted to conduct it. If the old revenue together with the new taxes yields a surplus after covering this interest and the government's ordinary expenses, perhaps the surplus can become a sinking fund to repay the debt. But first, even if used for no other purpose, such a sinking fund is generally wholly inadequate to repay the entire wartime debt within any period over which peace can reasonably be expected to last; second, the fund is almost always used for other purposes.

The new taxes were imposed solely to pay interest on the loans raised against them. Any excess they yield is generally unintended and unexpected, and therefore seldom substantial. Sinking funds have usually arisen less from tax proceeds exceeding the interest or annuity originally charged against them than from a subsequent reduction of that interest. Both Holland's sinking fund in 1655 and that of the ecclesiastical state in 1685 were formed in this way. Hence the usual inadequacy of such funds.

Even in the deepest peace, various events call for extraordinary spending, and governments always find it easier to meet these expenses by diverting the sinking fund than by imposing a new tax. Every new tax is immediately felt to some degree by the people; it always provokes some grumbling and opposition. The more numerous the taxes and the heavier the burden on every taxable object, the louder the complaints about each new tax, and the harder it becomes either to find new objects to tax or to raise existing taxes much further. A temporary suspension of debt repayment is not immediately felt by the people and provokes neither grumbling nor complaint. Borrowing from the sinking fund is always an obvious, easy way out of the present difficulty. The more public debt has accumulated, the more urgently it must be reduced; the more dangerous and ruinous it is to divert any part of the sinking fund, the less likely the debt is to be reduced substantially and the more likely—indeed, the more certain—the sinking fund is to be diverted to cover every extraordinary expense arising in peacetime. Once a nation is already overburdened with taxes, nothing but the needs of another war, the passion for national vengeance, or anxiety for national security can induce people to accept another tax with tolerable patience. Hence the usual diversion of the sinking fund.

In Great Britain, ever since we first resorted to the ruinous device of perpetual funding, peacetime reductions in the public debt have never been proportionate to its wartime growth. The foundation of Britain's present enormous debt was laid in the war which began in 1668 and ended with the treaty of Ryswick, in 1697.

On the 31st of December 1697, Great Britain's funded and unfunded public debts amounted to £21,515,742:13:8½. Much of this debt had been contracted on short anticipations, and some on life annuities; consequently, before the 31st of December 1701, in less than four years, £5,121,041:12:0¾d had either been paid off or reverted to the public. This was a greater reduction of public debt than has ever since occurred in so short a time. The remaining debt thus amounted to only £16,394,701:1:7¼d.

In the war that began in 1702 and ended with the treaty of Utrecht, public debts accumulated further. On the 31st of December 1714 they stood at £53,681,076:5:6½. Subscribing the short and long annuities into the South-sea fund increased the principal of the public debt, so that on the 31st of December 1722 it stood at £55,282,978:1:3 ⅚. Reduction began in 1723 but proceeded so slowly that by the 31st of December 1739, after seventeen years of profound peace, the entire sum repaid was only £8,328,554:17:11 ³⁄₁₂; the principal of the public debt then stood at £46,954,623:3:4 ⁷⁄₁₂.

The Spanish war, which began in 1739, and the French war soon following it brought a further increase in the debt. On the 31st of December 1748, after the war ended with the treaty of Aix-la-Chapelle, it amounted to £78,293,313:1:10¾. The deepest peace, lasting 17 years, had reduced it by only £8,328,354, 17:11¼. A war lasting less than nine years had added £31,338,689:18: 6 ⅙. [See James Postlethwaite's History of the Public Revenue.]

During Mr Pelham's administration, the interest on the public debt was reduced, or at least steps were taken to reduce it, from four to three per cent.; the sinking fund grew, and some public debt was paid off. In 1755, before the outbreak of the late war, Britain's funded debt amounted to £72,289,675. On the 5th of January 1763, at the peace settlement, the funded debt amounted to £122,603,336:8:2¼. The unfunded debt has been put at £13,927,589:2:2. But the expenses arising from the war did not end when peace was concluded. Thus, although on the 5th of January 1764 the funded debt rose, partly through a new loan and partly through funding some unfunded debt, to £129,586,789:10:1¾, there still remained, according to the very well-informed author of Considerations on the Trade and Finances of Great Britain, an unfunded debt entered in the accounts that year and the next of £9,975,017: 12:2 ¹⁵⁄₄₄d. In 1764, therefore, Britain's combined funded and unfunded public debt amounted, according to that author, to £139,561,807:2:4. The life annuities awarded as premiums to subscribers to the new loans in 1757, valued at fourteen years purchase, were also estimated at £472,500; long-term annuities likewise awarded as premiums in 1761 and 1762, valued at twenty-seven and a-half years purchase, were estimated at £6,826,875. During about seven years of peace, the prudent and truly patriotic administration of Mr Pelham could not pay off an old debt of six millions. During a war lasting nearly as long, a new debt exceeding seventy-five millions was contracted.

On the 5th of January 1775 Britain's funded debt amounted to £124,996,086, 1:6¼d; its unfunded debt, excluding a large civil-list debt, to £4,150,236:3:11 ⅞; and the two together to £129,146,322:5:6. On these figures, the entire debt repaid during eleven years of profound peace amounted to only £10,415,476:16:9 ⅞. Yet even this small reduction did not come entirely from savings in the state's ordinary revenue. Several other sums, wholly independent of that revenue, helped to pay it. These include an additional shilling in the pound land tax for three years; the two millions received from the East-India company in compensation for its territorial acquisitions; and the one hundred and ten thousand pounds received from the bank for renewal of its charter. We must add several further sums which, since they arose from the late war, should perhaps count as deductions from its costs. The principal are,

Proceeds from French prizes.............. £690,449: 18: 9 Payment for French prisoners............ 670,000: 0: 0

Received from the sale of the ceded islands.................................. 95,500: 0: 0

Total,.....................................£1,455,949: 18: 9

If to this sum we add the balance of the earl of Chatham's and Mr Calcraft's accounts, and other army savings of the same kind, together with receipts from the bank and the East-India company and the additional shilling in the pound land tax, the total must be considerably more than five millions. Thus the debt repaid since the peace from savings in the state's ordinary revenue has averaged less than half a million a year. The sinking fund has undoubtedly grown substantially since the peace through repayment of debt, reduction of the redeemable four per cents to three per cents, and expiration of life annuities. If peace continued, perhaps a million could now be spared from it annually to repay debt. Another million was indeed paid in the course of last year; but at the same time a large civil-list debt remained unpaid, and we are now caught in a new war that may, as it advances, prove as costly as any former war. [It has proved more costly than any one of our former wars and has involved us in an additional debt of more than one hundred millions. During eleven years of profound peace, little more than ten millions of debt was paid; during seven years of war, more than one hundred millions was contracted.] The new debt likely to be contracted before the end of the next campaign may nearly equal all the old debt paid off from savings in the state's ordinary revenue. It would therefore be sheer fantasy to expect the public debt ever to be completely repaid from any savings likely to be made from that ordinary revenue as it now stands.

In England, the government sits in the world's greatest trading city. Merchants are usually the people who lend it money. Their aim is not to reduce their business capital but to increase it. They would never subscribe to a new loan unless they expected to sell their share at a profit. But if they received payments for people's lifetimes instead of permanent yearly payments, they might not be able to sell so profitably. Whether those payments were tied to their own lives or other people's lives, selling would be harder. They would always lose money selling payments tied to their own lives: no one will pay as much for an annual payment tied to another person's life, even if that person's age and health are almost the same, as for one tied to their own life. A payment tied to a third person's life is certainly worth the same to seller and buyer. But its actual value begins to fall as soon as it is issued and keeps falling more and more for as long as it exists. It can never be as convenient an investment to transfer as a permanent yearly payment, whose actual value may be considered constant or nearly so.

In France, the government is not based in a major trading city, and merchants make up a smaller share of its lenders. Most lenders during public emergencies are people involved in managing the finances: the farmers-general, collectors of taxes not leased out, court bankers, etc. Such people commonly come from modest families, but are very wealthy and often very proud. They are too proud to marry women of similar status, while women of high rank refuse to marry them. They therefore often decide to stay unmarried. They have no children of their own and little affection for relatives whom they are not always eager to acknowledge. They want to live splendidly while they are alive and do not mind if their fortune ends when they die. France also has many more wealthy people than England who either do not want to marry or whose circumstances make marriage improper or inconvenient. People who give little or no thought to future generations find it especially convenient to exchange capital for income that lasts exactly as long as they want it and no longer.

Most modern governments spend all, or almost all, their normal revenue even in peace. When war begins, they are both unwilling and unable to raise revenue as much as their spending rises. They fear angering the people, who would quickly turn against the war if taxes rose sharply and suddenly. They also do not know which taxes could bring in enough money. The ability to borrow spares them the difficulty created by that fear and uncertainty. Through borrowing, they can raise enough each year to fight the war with only a moderate tax increase. Through perpetual funding, they can raise the largest possible annual sums with the smallest possible tax increase. In large empires, many residents of the capital and provinces far from the fighting suffer almost no inconvenience from the war. Instead, they comfortably enjoy reading newspaper reports of their fleets' and armies' achievements. For them, this entertainment makes up for the small difference between their wartime and peacetime taxes. They are usually unhappy when peace returns, ending both their entertainment and a thousand imagined hopes of conquest and national glory from continuing the war.

Peace seldom frees them from most taxes imposed during the war. Those taxes have been pledged to pay interest on the war debt. Once interest and ordinary government expenses are paid, the old revenue and new taxes might produce a surplus. That surplus might be used as a sinking fund to pay off the debt. But first, even if the fund is used only for this purpose, it is usually far too small to repay the entire wartime debt within any period over which peace can reasonably be expected to last. Second, the fund is almost always used for other purposes.

The new taxes were imposed solely to pay interest on loans backed by them. If they yield anything extra, that is usually neither intended nor expected, so the extra is seldom large. Sinking funds have generally arisen less from an initial tax surplus over the interest or annual payments charged on the taxes than from a later reduction of that interest. The funds of Holland in 1655 and the ecclesiastical state in 1685 were both created this way. This helps explain why such funds are usually inadequate.

Even in the deepest peace, events occur that demand exceptional spending. Governments always find it easier to divert the sinking fund than to impose a new tax. People feel every new tax immediately, to some degree. It always produces complaints and opposition. The more numerous the taxes, and the higher the taxes already charged on each taxable subject, the louder the complaints about each new tax. It also becomes harder to find new things to tax or raise existing taxes much further. People do not immediately feel a temporary halt in debt repayment, and they do not complain about it. Borrowing from the sinking fund is always an obvious, easy solution to the immediate problem. Yet as public debts grow, reducing them becomes more urgent, and diverting the sinking fund becomes more dangerous and damaging. The less likely substantial debt reduction becomes, the more likely—indeed the more certain—it is that the fund will be diverted to cover every exceptional expense during peace. Once a nation is already heavily taxed, only a new war, a desire for national revenge, or fear for national security can persuade people to accept a new tax with reasonable patience. That is why sinking funds are commonly misused.

Since Great Britain first adopted the damaging device of perpetual funding, peacetime debt reduction has never come close to matching wartime debt growth. The foundations of Britain's present enormous debt were first laid in the war that began in 1668 and ended with the treaty of Ryswick in 1697.

On the 31st of December 1697, Great Britain's funded and unfunded public debts totaled £21,515,742:13:8½. Much of this had been borrowed against short-term future receipts, and some against payments lasting for people's lifetimes. Thus, before the 31st of December 1701, less than four years later, £5,121,041:12:0¾d had either been partly repaid or returned to the public as the lifetime payments expired. No greater reduction of public debt has happened in so short a period since then. The debt left over was therefore only £16,394,701:1:7¼d.

Public debt grew further during the war that began in 1702 and ended with the treaty of Utrecht. By the 31st of December 1714, it totaled £53,681,076:5:6½. Exchanging short- and long-term payments for shares in the South-sea fund raised the principal of the public debt. On the 31st of December 1722, it therefore totaled £55,282,978:1:3 ⅚. Debt repayment began in 1723, but progressed so slowly that by the 31st of December 1739, after seventeen years of profound peace, only £8,328,554:17:11 ³⁄₁₂ had been paid off. The principal of the public debt then stood at £46,954,623:3:4 ⁷⁄₁₂.

The Spanish war that began in 1739, followed soon by the French war, increased the debt further. By the 31st of December 1748, after peace was concluded under the treaty of Aix-la-Chapelle, it totaled £78,293,313:1:10¾. Seventeen years of profound peace had reduced the debt by only £8,328,354, 17:11¼. Less than nine years of war added £31,338,689:18: 6 ⅙. [See James Postlethwaite’s History of the Public Revenue.]

Under Mr Pelham's administration, the interest on public debt fell from four to three per cent., or at least measures were taken to reduce it that far. The sinking fund grew, and some debt was paid off. In 1755, before the most recent war began, Britain's funded debt totaled £72,289,675. On the 5th of January 1763, when peace was concluded, funded debt amounted to £122,603,336:8:2¼. Unfunded debt was put at £13,927,589:2:2. Yet the war's expenses did not stop when peace came. By the 5th of January 1764, funded debt had grown to £129,586,789:10:1¾, partly through a new loan and partly by converting unfunded debt into funded debt. Even then, according to the well-informed author of Considerations on the Trade and Finances of Great Britain, an unfunded debt of £9,975,017: 12:2 ¹⁵⁄₄₄d was entered in the accounts for that year and the next. Thus in 1764, according to this author, Britain's funded and unfunded public debt together amounted to £139,561,807:2:4. Payments lasting for people's lifetimes that had been given as bonuses to new-loan subscribers in 1757 were valued at £472,500, estimating them at fourteen years purchase. Long-term payments similarly given as bonuses in 1761 and 1762 were valued at £6,826,875, estimating them at twenty-seven and a-half years purchase. During about seven years of peace, Mr Pelham's careful and genuinely public-spirited administration could not pay off an old debt of six millions. During a war lasting almost as long, a new debt of more than seventy-five millions was incurred.

On the 5th of January 1775, Great Britain's funded debt totaled £124,996,086, 1:6¼d. Unfunded debt, excluding a large civil-list debt, totaled £4,150,236:3:11 ⅞. The combined total was £129,146,322:5:6. By this reckoning, only £10,415,476:16:9 ⅞ of the debt had been paid off in eleven years of profound peace. Even that small reduction did not all come from savings in the state's ordinary revenue. Several other sums, completely separate from that revenue, helped pay it down. They included an extra shilling in the pound of land tax for three years, two millions paid by the East-India company in compensation for its territorial acquisitions, and one hundred and ten thousand pounds paid by the bank to renew its charter. Several other sums must be added as well. Because they came from the recent war, they should perhaps count as reductions in its costs. The main ones are:

Proceeds from French prizes.............. £690,449: 18: 9 Compensation for French prisoners......... 670,000: 0: 0

Received from the sale of the ceded islands......................... 95,500: 0: 0

Total,.....................................£1,455,949: 18: 9

Add to this the balance of the earl of Chatham's and Mr Calcraft's accounts, similar army savings, the sums received from the bank and East-India company, and the extra shilling in the pound of land tax. The total must be well over five millions. Thus the debt paid since peace out of savings from the state's ordinary revenue has averaged less than half a million a-year. The sinking fund has certainly grown substantially since peace: debt has been repaid, redeemable four per cents have been reduced to three per cents, and lifetime payments have ended. If peace continued, perhaps a million a year could now be set aside from it to repay the debt. Another million was indeed paid off last year. At the same time, however, a large civil-list debt went unpaid, and we are now involved in a new war that may prove as costly as any earlier war. [It has proved more expensive than any one of our former wars, and has involved us in an additional debt of more than one hundred millions. During a profound peace of eleven years, little more than ten millions of debt was paid; during a war of seven years, more than one hundred millions was contracted.] The new debt likely to be incurred before the next campaign ends may nearly equal all the old debt paid off from ordinary-revenue savings. It is therefore completely unrealistic to expect the public debt ever to be fully repaid from the savings likely to be made from ordinary revenue at its present level.