Book V, Chapter III, 4

One author has portrayed the public funds of Europe's indebted nations, particularly England's, as the accumulation of a great capital added to the country's other capital. By its means, he says, trade expands, manufactures multiply, and land is cultivated and improved far beyond what the other capital alone could have achieved. He overlooks the fact that the capital the public's first creditors advanced to the government was, from the moment they advanced it, a portion of the annual produce diverted from serving as capital to serving as revenue: from maintaining productive laborers to maintaining unproductive ones, and to being spent and wasted, generally within the year, without even the prospect of future reproduction. In return for their advance, those creditors did indeed obtain an annuity from the public funds, in most cases worth more than what they had advanced. That annuity undoubtedly replaced their capital for them and enabled them to carry on their trade and business as extensively as before, or perhaps more so. They could either borrow new capital from others on the credit of the annuity or sell it and obtain from others new capital of their own, equal or superior to what they had advanced to the government. Yet the new capital they thus bought or borrowed must already have existed in the country and, like all capital, must have been employed in maintaining productive labor. When it reached the hands of those who had lent to the government, it was in some respects new capital to them, but not to the country: it was merely capital withdrawn from some employments and directed toward others. Although it replaced what they had advanced to the government, it did not replace it for the country. Had they not advanced that capital, the country would have had two capitals, two portions of its annual produce, rather than one, employed in maintaining productive labor.

When a revenue raised within the year from the proceeds of free, unmortgaged taxes pays the government's expenses, a portion of private people's revenue is merely diverted from maintaining one kind of unproductive labor to maintaining another. Some of what they pay in such taxes might, certainly, have been accumulated as capital and employed in maintaining productive labor. But most of it would probably have been spent, and thus employed in maintaining unproductive labor. Public expenditure paid in this way undoubtedly obstructs, to some degree, the further accumulation of new capital; it does not necessarily destroy any capital already in existence.

When public expenditure is met by funding, it is met through the yearly destruction of capital that previously existed in the country: a portion of the annual produce formerly intended to maintain productive labor is turned to the maintenance of unproductive labor. In this case, however, taxes are lighter than they would have been if enough revenue to meet the same expense had been raised within the year. Individuals' private revenue is therefore less burdened, and their ability to save and accumulate some of it as capital is correspondingly less impaired. Funding destroys more old capital but, at the same time, obstructs the accumulation or acquisition of new capital less than paying public expenses with revenue raised within the year. Under funding, the thrift and industry of private people can more readily repair the breaches that the government's waste and extravagance sometimes make in society's general capital.

Funding has this advantage over the other system, however, only while war continues. If the cost of war were always met with revenue raised within the year, the taxes that yielded that extraordinary revenue would end with the war. Private people's ability to accumulate, though reduced during war, would be greater during peace than under funding. War would not necessarily destroy any old capital, and peace would bring the accumulation of far more new capital. Wars would generally end sooner and be undertaken less wantonly. Feeling the full burden of war while it lasted, the people would soon tire of it; and the government, to accommodate them, would not have to carry it on longer than necessary. Anticipation of war's heavy and unavoidable burdens would keep the people from clamoring for it when no real or substantial interest was at stake. Periods when private people's ability to accumulate was somewhat impaired would be rarer and shorter. Periods when that ability was at its strongest, by contrast, would last much longer than they can under funding.

Furthermore, once funding has advanced far enough, the multiplication of taxes it brings sometimes impairs private people's ability to accumulate even in peace as much as the other system would in war. Great Britain's peacetime revenue now exceeds ten millions a year. If free and unmortgaged, it might, with proper management and without incurring a shilling of new debt, suffice to conduct the most vigorous war. The private revenue of Great Britain's inhabitants is now as encumbered in peace, and their ability to accumulate as impaired, as it would have been during the most expensive war if the pernicious system of funding had never been adopted.

It has been said that, when interest on the public debt is paid, the right hand pays the left. The money stays in the country. One group of inhabitants merely transfers part of its revenue to another, and the nation is not a farthing poorer. This defense rests entirely on the sophistry of the mercantile system; after the long examination I have already devoted to that system, perhaps nothing more need be said about it. It also assumes that the entire public debt is owed to the country's inhabitants, which is untrue: the Dutch and several other foreign nations hold a very considerable share of our public funds. But even if the entire debt were owed to the country's inhabitants, it would be no less pernicious for that reason.

Land and capital stock are the two original sources of all revenue, private and public. Capital stock pays the wages of productive labor, whether employed in agriculture, manufactures, or commerce. The management of these two original sources of revenue belongs to two distinct groups: proprietors of land and owners or employers of capital stock.

To protect his own revenue, the proprietor of land has an interest in keeping his estate in the best condition he can: building and repairing his tenants' houses, constructing and maintaining necessary drains and enclosures, and making all the other costly improvements that properly fall to a landlord to make and maintain. But various land taxes may so reduce his revenue, and duties on life's necessities and conveniences may so diminish the real value of what remains, that he finds himself wholly unable to make or maintain those costly improvements. Once the landlord ceases to do his part, the tenant cannot possibly continue doing his. As the landlord's distress grows, the country's agriculture must decline.

When various taxes on life's necessities and conveniences lead the owners and employers of capital stock to find that the revenue they derive from it will buy less of those things in one country than an equal revenue would buy in almost any other, they will be inclined to move elsewhere. And when raising those taxes exposes all or most merchants and manufacturers—that is, all or most employers of great capitals—to continual, humiliating, and vexatious visits from tax collectors, the inclination to move will soon become a move in fact. With the departure of the capital that supported it, the country's industry must fall; the ruin of trade and manufactures will follow the decline of agriculture.

To transfer the greater part of the revenue arising from land and capital stock away from their owners—the people directly concerned with the condition of every particular piece of land and the management of every particular portion of capital stock—to another group, the public creditors, who have no such particular interest, must in the long run bring both neglect of the land and the waste or removal of capital stock. A public creditor certainly has a general interest in the prosperity of the country's agriculture, manufactures, and commerce, and thus in the sound condition of its land and the sound management of its capital stock. If any of these declined or failed generally, the proceeds of the various taxes might no longer suffice to pay the annuity or interest due to him. But a public creditor, considered simply as such, has no interest in the condition of any particular piece of land or the management of any particular portion of capital stock. As a public creditor, he has no knowledge of any such portion. He does not inspect it. He can take no care of it. Its ruin may in some cases escape his notice and cannot affect him directly.

Funding has gradually weakened every state that has adopted it. The Italian republics appear to have begun the practice. Genoa and Venice, the only two remaining that can claim an independent existence, have both been weakened by it. Spain seems to have learned it from the Italian republics and, its taxes probably being less judicious than theirs, has been weakened still more in proportion to its natural strength. Spain's debts are very old. It was deeply indebted before the end of the sixteenth century, about a hundred years before England owed a shilling. France, despite all its natural resources, languishes beneath a similarly oppressive load. The republic of the United Provinces has been weakened by its debts as much as Genoa or Venice. Can a practice that has brought weakness or dissolution to every other country really prove entirely harmless in Great Britain alone?

It may be said that the tax systems established in those countries are inferior to England's. I believe they are. But we must remember that, once even the wisest government has exhausted all proper subjects of taxation, urgent necessity will force it to resort to improper ones. The wise republic of Holland has at times had to resort to taxes as inconvenient as most of Spain's. Another war, begun before any substantial release of public revenue has been achieved and becoming as expensive as the last, may by irresistible necessity make the British tax system as oppressive as Holland's, or even Spain's. To the credit of our present tax system, it has so far interfered so little with industry that, even during the most expensive wars, individuals' thrift and good management seem to have repaired through saving and accumulation every breach made in society's general capital by the government's waste and extravagance. At the end of the recent war, the most expensive Great Britain had ever waged, her agriculture was as flourishing, her manufacturers as numerous and fully employed, and her commerce as extensive as ever before. The capital supporting all those branches of industry must therefore have been as great as ever. Since peace returned, agriculture has improved further; house rents have risen in every town and village in the country, evidence of the people's increasing wealth and revenue. The yearly yield of most old taxes, especially the chief branches of excise and customs, has also continually increased, equally clear evidence of growing consumption and therefore of the growing produce that alone could sustain it. Great Britain seems easily to bear a burden that, half a century ago, no one believed she could bear. Let us not, however, rashly conclude that she can bear any burden at all; nor be too confident that she could bear, without great distress, even a slightly greater one than that already imposed upon her.

Once national debts have accumulated to a certain level, I believe there is scarcely a single instance of their having been honestly and fully paid. If public revenue has ever been freed from them at all, it has always been through bankruptcy—sometimes openly declared, though often disguised as payment.

One writer has described the public funds of Europe's indebted nations, especially England's, as a large addition to the country's other capital. He says this extra capital lets the country expand trade, increase manufacturing, and cultivate and improve its land far more than its other capital alone could. But he overlooks what happened to the capital that the government's first creditors lent it. From the moment each creditor lent it, part of the year's produce stopped serving as capital and started serving as revenue. Instead of supporting productive laborers, it supported unproductive ones. It was usually spent and used up within the year, with no prospect of producing anything in the future. The lenders did receive an annuity from the public funds in return, usually worth more than the capital they had lent. That annuity certainly replaced their capital from their point of view. It let them continue their businesses on the same scale as before, or perhaps a larger one. They could either use the annuity as security to borrow new capital from others, or sell it to obtain new capital of their own from others, equal to or greater than the amount they had lent the government. But this capital they borrowed or bought already existed in the country. Like all capital, it had been supporting productive labor. In the lenders' hands it was new capital to them in some respects, but not new capital to the country. It had simply moved from one use to another. It replaced what the lenders had advanced to the government, but it did not replace that capital for the country. If they had not lent it, the country would have had two portions of the year's produce, rather than one, supporting productive labor.

When the government pays its expenses with revenue raised during the year from taxes that are free and unpledged, it mainly diverts some private income from supporting one kind of unproductive labor to supporting another. Some of the money paid in those taxes might certainly have been saved as capital and used to support productive labor. But most would probably have been spent and used to support unproductive labor. Paying public expenses in this way does, to some extent, prevent further savings from building new capital. It does not necessarily destroy any capital that already exists.

When public expenses are paid by borrowing on the public credit, some capital already in the country is destroyed each year. Part of the year's produce that would have supported productive labor is diverted to support unproductive labor. But taxes are lighter than they would be if enough revenue to meet the expenses were raised during the year. Private incomes bear less of a burden, so people's ability to save part of their income and build capital is reduced much less. Funding destroys more existing capital but does less to prevent the saving or acquisition of new capital than paying public expenses out of revenue raised within the year. Under funding, private thrift and work can more easily repair the losses that government waste and extravagance sometimes cause to society's capital as a whole.

Funding has this advantage over the other method only while a war continues. If the expenses of war were always paid from revenue raised within the year, the taxes providing that extra revenue would end with the war. People would be less able to save during war, but more able to save during peace than under funding. War would not necessarily destroy any existing capital, and peace would bring the accumulation of much more new capital. Wars would generally end sooner and be started less recklessly. People who felt the full burden of a war while it lasted would soon tire of it. To please them, the government would not have to carry on a war longer than necessary. The prospect of war's heavy and unavoidable costs would keep people from recklessly demanding one when they had no real or substantial interest to fight for. Periods when people's ability to save was somewhat reduced would occur less often and last less time. Periods when that ability was strongest would last much longer than they can under funding.

Once funding has developed to a certain point, the many taxes that come with it can reduce people's ability to save even in peace as much as the other method would during war. Great Britain's peacetime revenue now exceeds ten millions a year. If it were free and unpledged, proper management could use it to wage the most vigorous war without borrowing a shilling more. In peacetime today, the private incomes of Great Britain's inhabitants are as heavily burdened, and their ability to save as badly reduced, as they would have been during the costliest war if the harmful practice of funding had never been adopted.

People have said that paying interest on the public debt is like the right hand paying the left. The money stays in the country. Revenue is merely transferred from one group of inhabitants to another, and the nation is not a farthing poorer. This defense rests entirely on the false reasoning of the mercantile system. After my lengthy examination of that system, I may not need to say more about it. It also assumes that all public debt is owed to the country's inhabitants. That is not true: the Dutch and several other foreign peoples hold a very large share of our public funds. But even if all the debt were owed to the country's inhabitants, it would be no less harmful for that reason.

Land and capital stock are the two original sources of all private and public revenue. Capital stock pays the wages of productive labor, whether that labor is in agriculture, manufacturing, or commerce. The management of these two sources belongs to different people: landowners and the owners or employers of capital stock.

A landowner has an interest in keeping his estate in the best possible condition for the sake of his own revenue. He builds and repairs his tenants' houses, makes and maintains the needed drains and fences, and pays for the other expensive improvements that properly fall to the landlord. But land taxes can reduce his revenue so much, while taxes on life's necessities and comforts can make what remains worth so little, that he can no longer afford to make or maintain those improvements. Once the landlord stops doing his part, the tenant cannot possibly keep doing his. As the landlord's financial troubles increase, the country's agriculture must decline.

Taxes on life's necessities and comforts can also make owners and employers of capital stock find that the revenue they earn from it buys less in one country than an equal revenue would buy in almost any other. They will then be inclined to move elsewhere. To collect those taxes, tax collectors must also make constant, irritating and humiliating visits to all or most merchants and manufacturers—the people who employ large amounts of capital. Their inclination to leave will soon turn into actual departure. When the capital supporting a country's industry leaves, that industry must decline. The collapse of trade and manufacturing will follow the decline of agriculture.

Most of the revenue from land and capital stock belongs in the hands of the owners of those two great sources of revenue. These owners have an immediate interest in the condition of each piece of land and the management of each portion of capital stock. If most of that revenue is instead transferred to another group—the public creditors, who have no such particular interest—the long-term result must be neglected land and wasted or departing capital stock. A public creditor does have a general interest in the prosperity of the country's agriculture, manufacturing, and commerce, and therefore in the good condition of its land and the good management of its capital stock. A general failure or decline in these might leave tax revenues too low to pay the annuity or interest due to him. But considered simply as a public creditor, he has no interest in any particular piece of land or portion of capital stock. He knows nothing about it, does not inspect it, and cannot look after it. He might never learn that it has been ruined, and its ruin cannot directly affect him.

Funding has gradually weakened every state that adopted it. The Italian republics seem to have started the practice. Genoa and Venice, the only two still able to claim an independent existence, have both been weakened by it. Spain seems to have learned the practice from them. Its taxes were probably less wisely chosen, and relative to its natural strength it has been weakened even more. Spain's debts are very old. It was deeply in debt before the end of the sixteenth century, about a hundred years before England owed a shilling. Despite all its natural resources, France suffers under a crushing debt of the same kind. The republic of the United Provinces is as weakened by its debts as Genoa or Venice. Can a practice that has brought weakness or collapse to every other country really be harmless in Great Britain alone?

It may be said that those countries' systems of taxation are worse than England's. I believe they are. But remember that once even the wisest government has exhausted all suitable things to tax, urgent need forces it to tax unsuitable ones. The well-governed republic of Holland has sometimes had to impose taxes as inconvenient as most of Spain's. If another war starts before any substantial part of the public revenue has been freed from debt payments, and grows as costly as the last war, unavoidable necessity may make British taxes as oppressive as Holland's or even Spain's. To the credit of our present tax system, it has so far caused so little difficulty for industry that even during the most costly wars, private thrift and good management seem to have saved and accumulated enough to repair all the damage government waste and extravagance did to society's total capital. At the end of the last war, the most expensive Great Britain ever fought, agriculture was as prosperous, manufacturers as numerous and fully employed, and commerce as extensive as ever before. The capital supporting all those industries must therefore have been as great as ever before. Since peace came, agriculture has improved further. House rents have risen in every town and village, showing that people's wealth and revenue have increased. The yearly proceeds of most old taxes, especially the main excise and customs duties, have also risen steadily. This is equally clear evidence of growing consumption and, therefore, growing production, which alone could support that consumption. Great Britain seems to carry easily a burden that nobody thought it could carry half a century ago. But we should not hastily conclude from this that it can carry any burden, or even be too sure it could carry one slightly heavier than its present burden without great hardship.

Once national debts have reached a certain size, I believe there is hardly a single case of their being paid in full and in good faith. If public revenue has ever been freed from debt payments, it has always been through bankruptcy. Sometimes the bankruptcy was openly declared, but more often it took the form of a payment that was only a pretense.