BOOK V, CHAPTER IV
HISTORY OF THE FRENCH DEBT, INDEBTEDNESS IN OTHER COUNTRIES
§ 1. A natural division of the history of the French debt is that into two parts; the former dealing with the borrowing under the Monarchy, and the latter with that under the system founded during the Revolution. The history of the various loans previous to the present century has been concisely described as 'a history of bankruptcies.'*40 All forms of loans were tried; and all possible methods of evasion were used to escape repayment. The costly wars and the internal disturbances of the country partly explain this course of policy, but ignorance of financial and economic conditions was the great cause. Forced reductions of debt and debasements of the currency were frequently employed. An extensive revision was carried out by Sully in 1604, and further reductions were made by Mazarin. Colbert's administration introduced some system into this part of finance, but after his death the older confusion reappeared. One of the effects of the Mississippi scheme was a consolidation of the diverse forms of the debt, and a reduction of its amount to a sum, estimated at 1,700,000,000 livres, with an annual charge of 48,000,000 livres.*41
The reign of Louis XV. (1715-1774) was marked by fresh loans and repeated forced reductions of the capital debt. In 1764 the sum of the different liabilities was 2,360,000,000 livres and the annual charge 93,000,000 livres; at his death the total annual charge was 120,000,000 livres, besides a floating debt of 235,000,000 livres. The increasing embarrassments of the State, which might have been overcome by Turgot, had he remained in office, were at least the proximate cause of the summoning of the States-General, and therefore of the Revolution.*42 According to the report submitted by the committee of the Constituent Assembly in November, 1789, the annual debt charge came to 208,000,000 livres, to which the floating debt had to be added.*43
§ 2. The financial difficulties that surrounded the revolutionary governments led to large issues of assignats, and to a consolidation of the public debt on a plan arranged by Cambon (August, 1793). By it all debt was to be inscribed in a 'Grand-book,' which was to be the conclusive evidence of the claim. The redeemable debt with 5 per cent. interest was first so treated, and the annuities were afterwards added. The result was the creation of an annual charge of £7,000,000 (174,716,000 francs), or a capital debt of £140,000,000. Unfortunately, the use of paper money and forced loans destroyed whatever benefit this systematic treatment might have conferred, and the straits of the government led to the measure of 1797 (Vendémiaire, Ann vi.), by which two-thirds of the debt was 'paid off' (?) in bonds to be exchanged for land, and, after some reductions for confiscations, the balance in annual interest was ascertained to be £1,600,000 (40,216,000 francs), representing a capital debt of £32,000,000. About £250,000 was added to the interest charge by the Directory, so that by the opening of 1800, 46,300,000 francs was the annual payment. The financial administration of Napoleon I., or rather of his advisers in such matters, Gaudin and Mollien, had two great merits. It resisted all temptations to issue inconvertible paper money, and it steadily refused to meet war expenditure by the method of borrowing. The result is to be seen in the position of the public debt at the fall of the Empire. In April, 1814, the interest had risen to 63,300,000 francs (£2,530,000). After allowing for the debts of the annexed provinces, the net increase was less than £300,000 interest, or £6,000,000 capital. In qualification of this favourable situation the immense burdens imposed on France and other countries must be taken into account. The Napoleonic system of making war support itself was a crushing one for the nations subjected to its operation, and probably far heavier than a well-managed public debt would have been.*44
The Government of the Restoration had a series of difficult financial tasks to face. It had to meet the war indemnity levied on France by the allies; it had to compensate the emigrants; and it had to take up the unpaid balance of the Imperial outlay. It handled these various problems with honesty and firmness, refusing altogether to repudiate the debts of the Empire, as some of its supporters wished. The principal feature of debt history during the period 1815-1830 is the creation of new debts to meet the indemnities and other outlay. The total amount required for these purposes represented an annual charge of over £6,500,000.*45 A second noticeable point was the creation of other than 5 per cent. stock. The emigrants' indemnity was in 3 per cent. stock, and the conversion of 1824 was partly in 4½ per cents. and partly in 3 per cents. At the same time the policy of redemption was effectively carried on. The annual charge was reduced by 54,000,000 francs (£2,160,000), and conversion removed about 6,000,000 francs. These sums, with a few small escheats to the State, practically wiped out the debt existing in 1814, leaving that created by the Restoration Government (though it was not responsible for it) as the actual charge. From another point of view it may be said that in the fifteen years there was a net increase of £4,000,000 interest. The capital of the new loans amounted to nearly £132,000,000, less the sum of £43,000,000 redeemed, or a net capital increase of about £90,000,000.
The Orleanist Government commenced its career by borrowing. Its first loan added £280,000 to the interest charge, and was issued in 5 per cent. stock at 84, or nearly 6 per cent. on the actual sum received. Another loan of £4,000,000 at par only brought in £800,000. Further loans were made, in order to clear off deficits, to prepare for war, and to carry out public works, but the redemption of existing debt was also carried on, so that against £1,500,000 fresh interest created, about £1,000,000 was redeemed, leaving a net increase of £500,000 during eighteen years, but, it should be said, years of profound peace during which public credit stood high.*46 The position of the stocks over 3 per cent. would have easily admitted of conversion, without any increase of capital, into a 4 per cent. or even 3½ per cent. stock, but to avoid popular hostility this financially prudent course was not taken.*47*48
Short as was the duration of the Second Republic, it added £2,120,000 to the interest of the debt, and thus brought the total charge to nearly £9,200,000. The complete disorganisation of the financial system and the hazardous experiments of the provisional government sufficiently account for this state of things.
The first financial performance of the Second Empire was the conversion of the 5 per cent. stock, amounting to £140,000,000, into 4½ per cent., with a gain to the State of £700,000 per annum. Less than £3,000,000 of capital had to be paid to dissenting creditors. But the management of the war expenditure was not so satisfactory. The total cost of the Crimean War to France was £66,000,000 and of this sum £61,500,000, or 93 per cent. of the whole, was added to the debt. Further loans, issued much under par, followed for the Italian and Mexican wars. The total addition to the debt between 1852 and July 1870 was represented by an increased interest charge of £5,160,000. Thus the annual payment had risen to £14,400,000, and the capital was a little less than £480,000,000. Even more questionable than the large borrowing was the conversion of 1862, by which, for the sake of a premium, the 4½ and 4 per cent. stocks were converted into 3 per cents., with a proportionally increased nominal capital. This unjustifiable measure gained a premium of £6,300,000 for the State, but on the other hand it increased the capital of the debt by almost £64,000,000, and precluded the hope of further speedy conversion.*49
§ 3. The Franco-German War of 1870-1 is as marked a period in the development of the French debt as the war with Napoleon I. was in the case of the English one. Its first effect was to place an enormous strain on the resources of the new government. In addition to the terrible expense and sacrifice due to the military operations there was the indemnity of £200,000,000 to the Germans. The total burden imposed on the State has been estimated at £393,000,000. Of that sum about £340,000,000 was raised through loans of one kind or other. Nearly £60,000,000 was received from the Bank of France by the inconvertible paper issues. Over £40,000,000 was borrowed in 1870, and two great loans, the first of £80,000,000, the second of £120,000,000, were raised in 1871 and 1872.*50
The debt incurred to the Bank of France was cleared off by annual payments, at first of £8,000,000, and afterwards of £6,000,000, until in 1879 the whole was discharged. In other respects the treatment of the debt has been weaker. Fresh loans have been contracted for public works, and to meet budget deficits. M. Freycinet's plans accounted for a large part of this increase in debt, which was raised in 3 per cent. stock terminable after seventy-five years. Thus a new category of debt was added to the old perpetual rentes, with a nominal capital of £160,000,000, an interest charge of £4,800,000, and a further charge of £1,000,000 for redemption. The old 5 per cents. were converted in 1883 into 4½ per cents. without any increase of capital, and merely with the proviso that no further reduction would be attempted for ten years. In 1894 the expiration of this term and the high price of the stock allowed of a fresh conversion into 3½ per cents. which was successfully completed. Out of a total capital of £271,500,000, only £55,750 was demanded by the holders, the remainder being retained at the lower interest. In this way the State gained over £2,700,000 annually. A further step in the treatment of this stock has been made in 1902 by M. Rouvier's measure for its reduction to 3 per cent., accompanied by a bonus of 1 per cent. to those who accept the conversion, and a guarantee against redemption for eight years. Besides the reduction in interest there is the additional advantage of consolidating the stock with the larger mass of existing 3 per cents.
Notwithstanding these important economies, both the annual charge and the capital account of the French debt are extremely heavy. The consolidated debt amounts to £880,000,000, with annual interest of nearly £28,000,000. When the other liabilities are added we get the enormous total of £1,300,000,000, involving an annual cost of £50,000,000, of which about £3,500,000 is applied to its redemption.*51
The French debt is by far the largest in the world, being double the English in annual charge, and over £500,000,000 greater in capital amount. This great accumulation of debt has been altogether the work of the present century. A comparison with the English debt will show the steps by which the latter has been approached and then passed. It is also interesting to note the widening distribution of rentes among the French population. In 1830 the holdings of stock were only 125,000 in number. By 1869 they had increased tenfold, while in 1881 they numbered more than 4,000,000. The great mass of the debt is in the hands of Frenchmen, and divided among all classes of society. This, though in some respects desirable, hampers a finance minister in such processes as conversion or repayment, as the fundholders' interest is at once powerful, and in immediate opposition to that of the State.
Some alleviation of the burden may in the future be reasonably expected from (1) the gradual redemption of the 3 per cent. stock created since 1878, a process to be finished in 1952, and (2) from the falling in of the railway property, which, as we saw, will happen at about the same time.*52 But the benefits to be thus received will largely depend on the methods employed in the next fifty years. If deficits are allowed to continue, if injudicious expenditure is carried on, and if new public works are started, it is certain that a fresh debt, perhaps exceeding that now in existence, will be formed by the middle of the next century.
§ 4. Italian unity has, at least from the financial point of view, been purchased at a heavy price. Not only has the weight of taxation been inordinately increased, but a large public debt has been contracted. The new kingdom had to take up the debts of its predecessors, and from its formation up to 1875 each year's budget showed an excess of expenditure over receipts.*53 The use of loans, either openly, or by the issue of inconvertible paper, was the inevitable result. The latter expedient was in force from 1866 to 1883, when it was removed by means of a loan of over £29,000,000 in specie. Since then, however, there have been further deficits and an increase of liabilities, so that the total capital of the Italian debt at the close of the 19th century amounted to £514,500,000, involving an annual charge of £23,194,000.*54 About £6,000,000 of this sum has been an inheritance from the earlier States, and the war of 1866 is accountable for part of the balance; but the great source has been the budget deficits in ordinary years, that have gradually accumulated in the present heavy burdens.
The situation of the German States is in sharp contrast with that of the countries already considered. They are not weighed down by debt charges, and they have the advantage of possessing assets against a good deal of their apparent liabilities. As appeared in connexion with the quasi-private income, the retention of the domain, both agricultural and industrial, has been more marked in Eastern Europe, and this difference in policy has affected the position of the public debt.
The use of a State treasure prevented the employment of loans by Prussia up to the French war of 1792. From that time the public necessities were too pressing, and some debt was contracted, which by 1820 came to nearly £33,000,000 with a yearly charge of £1,140,000, and a sinking fund which brought the total annual cost up to £1,500,000. During the next thirty years the debt was reduced by the sale of public property and by suitable taxation, until in 1848 the interest charge was only £650,000. Between 1850 and 1870 there were increases both for public works and war expenditure, that by the end of the latter year brought the total debt to £66,700,000. Since then the purchase of the railways has added heavily to the nominal debt. The process of redemption has also been carried on to such an extent that there is an actual diminution of the non-productive part. In fact, the railway receipts have in some years more than sufficed to meet their expenses and the whole cost of the interest and sinking fund on the debt. The total debt has grown to nearly £330,000,000, and the interest charge to nearly £14,000,000, but owing to the assets acquired by its means, the Prussian debt is less oppressive than that of any other European country.*55
The four important secondary States in Germany are somewhat similarly placed. The whole debt of Baden is for railway construction, as is the far greater part of those of Saxony and Würtemberg. Two-thirds of the Bavarian debt was incurred for the same object. As the railways have in recent years contributed more than the interest on their part of the debt, there is a considerable relief to the taxpayers, and if liquidation were necessary, the assets would leave a balance.
At its establishment the German Empire took up the debt of the North German Bund, which consisted in loans for the war of 1870-1, amounting to over £30,000,000, and which has been almost entirely paid off. New loans have, however, been issued for extraordinary expenditure—and in the latest case to meet a deficit—which have brought the debt to nearly £120,000,000 with an annual charge of £4,400,000. The various Imperial funds must be placed on the other side of the account; they, as we saw,*56 come to £25,000,000, thus leaving over £90,000,000 as the net liability.
§ 5. The United States, again, have a different debt history from any of the preceding countries, and one that suggests some points of interest. After the adoption of the Constitution, Hamilton prepared and carried a scheme of funding by which the debts due to France and Spain, those owed to natives by the Congress, and lastly the debts of the States, were combined. The total debt was in 1791 $75,000,000. Notwithstanding the creation of a sinking fund, the amount due increased in 1796 to $84,000,000. By 1812 it was reduced to $45,000,000. The war with England led to a greater outlay, which was for the most part met by loans.*57 In 1816 the debt had reached $127,000,000. From that point there was a steady reduction, till in 1835 the total debt was only $37,000, or practically nil. During the following years some temporary loans were made, as e.g. for the Mexican War (1848), and the total debt stood at about $60,000,000 when the Civil War broke out.*58
The first results of the contest were a serious disturbance of industry and commerce and a great increase of expenditure. No adequate tax-system was in existence, and accordingly the extraordinary expenditure was at first almost entirely met by the use of credit. Treasury notes, culminating in inconvertible paper issues, and funded debt were both employed. It was not until 1864 that the tax revenue was made a really effective contributory to the war expenses, but from that date its development was rapid.*59 Soon after the close of the war the debt touched its highest point. According to Mr. Bolles, 'On the 1st September (1865) the debt recorded on the books of the Treasury reached its maximum, though a large amount of war obligations, pensions, &c., were not yet paid.'*60 This maximum was represented by the sum of $2,846,000,000, of which only $1,110,000 was funded debt, and about $460,000,000 inconvertible paper; the enormous sum remaining—$1,276,000,000—was in the form of floating debt, most of it immediately repayable. The cash reserve in the treasury was, however, only $88,000,000, leaving net liabilities to the amount of $2,758,000,000.
The great financial problems for the Secretary to the Treasury were therefore (1) to pay off, or fund, the floating debt, and (2) to provide a permanent scheme for the future extinction of the immense liabilities created by the war. The former required immediate attention, and was successfully managed. In a little over two years the floating debt was brought down to $408,000,000, and the inconvertible issues reduced by over $20,000,000, while new funded debt to the amount of $686,000,000 in 6 per cent. bonds had been issued. The temporary obligations were cleared off in 1868, leaving free scope for the repayment, and when possible the conversion, of the funded debt.
A sinking fund law had been enacted in 1862, but as there was no real surplus till 1866 it was inoperative, and in fact the payment of debt has not been carried on in conformity with that law. It has, notwithstanding, been on an immense scale, as the following short table proves:—
Thus in a little over a quarter of a century $2,100,000,000 was removed from the capital liability, and the annual payment reduced by nearly $130,000,000. This at first sight extraordinary result was due in part to the high credit of the United States Government, which enabled the 6 per cent. and 5 per cent. bonds, as they fell due, to be reduced to 4½ per cent. and even 3½ per cent. A more potent cause existed in the receipt of large annual surpluses, the natural consequence of the high duties on imports. The protective system was in this way the cause of the repayment of the war loans. From the financial point of view it is plain that a like result could have been reached at much less real cost and sacrifice, if moderate duties had been used; but then it is doubtful whether in that case the policy of repayment would have been so firmly adhered to.
As a result of this vigorous treatment the position of the federal debt ceased for a time to be a prominent question in American finance. Such importance as it had arose in connexion with the management of the treasury and the banking system. The first change in this satisfactory condition was the outcome of the depression of 1891-3. In order to maintain the gold reserve the plan of issuing loans was tried.*61 Owing to the increase of expenditure and the policy of the Tariff Acts of 1890 and 1894 the surpluses which had been realised in every year since 1874 were replaced by deficits,*62 which in the six years 1893-9 amounted to $281,000,000, the war with Spain only accounting for a small part of this sum.*63 Consequently the debt increased from its minimum point of 1892 to $1,046,048,000, i.e. an addition in seven years of $461,000,000, or 78 per cent.*64 The interest charge, in spite of the low interest on some of the loans, also advanced to $40,347,000. The financial years 1899-1900 and 1900-1 have both seen reductions of the capital charge and interest. The process of conversion has been actively carried on, three, four, and five per cent. loans being converted into a two per cent. stock. Thus the 4½ per cent. debt has entirely, and the 5 per cent. very nearly, disappeared, and almost half of the capital bears only two per cent. interest, while the average is less than three per cent.*65 Should the revenue continue to show surpluses as large as those of 1900 and 1901 the practical extinction of the debt will be soon accomplished.
§ 6. The debt systems of other countries need not be considered in detail. They exhibit the same general features, but in some cases afford instructive variations on those already noticed. The most important countries are Austria-Hungary and Russia. In the former there is a separate account for the old common debt existing before 1867, and each part of the dual monarchy has its own debt account. The interest charge for 1902 is £14,750,000 for Austria, and £10,875,000 for Hungary. The combined capital amounts to £550,000,000. The Russian debt has been affected all through its history by the inconvertible paper currency and the autocratic character of the government. In recent years the expenditure on railway extension has been another cause of increase. In 1892 the debt capital was £575,000,000. After ten years it had increased to £693,000,000 with an annual interest charge of £27,600,000.*66
Another interesting group of debts is that of the British Colonies and dependencies. The Indian debt is about £165,000,000; the Australasian colonies have a total debt of £240,000,000; the Canadian Dominion £70,000,000, and the South African colonies £40,000,000.*67 Most of these sums have been borrowed for reproductive purposes.
One general fact is discernible in the course of the modern history of debts, viz. the universal tendency to increase and in some cases to press dangerously on the limits of national solvency. Any attempt to present the total amount of indebtedness at a given time soon becomes misleading, owing to the growing liabilities of the world.
Notes for this chapter
Vührer, i. 320. Cp. Ehrenberg's account of Spanish finance in the 16th century. 'Es trieb rettungslos aus einer Krisis in die andere. Staatsbankerott und Zwangsconsolidation wurden gewöhnliche Finanzmittel,' Zeitalter der Fugger, ii. 259.
Ib. i. 181. The estimates, however, are not in agreement. Ib. 1. 178.
Necker's policy of meeting deficits by borrowing, in opposition to that of Turgot's, is justly condemned by Gomel, Causes Financières de la Révolution Française, i. ch. 8.
Vührer, i, 336. But see for a higher estimate, Gomel, i. 487-9.
On the debt system of the First Empire, see Vührer, ii. 31-58.
Vührer, ii. 160.
In 1845 the highest and lowest prices of the several stocks were:
Leroy-Beaulieu, ii. 498.
Vührer, ii. 238.
For the finance of the Second Empire, see Vührer, ii. 258-369.
The loans contracted were as follows:
Cp. Vührer, ii. 538; Leroy-Beaulieu, ii. 573. For a full treatment of the finance of the early years of the Third Republic, see Léon Say, Les Finances de la France, vols. i. and ii. His account is first hand evidence.
The constitution of the French debt on January, 1st, 1901, was as follows:
The conversion of the 3½ per cent. rentes will bring the general 3 per cents. to 22,000,000,000 frs. The capital value of the life charges cannot be put at less than 25,000,000,000 frs.
See Bk. ii. ch. 3, § 13.
These annual deficits, 'which began with £15,000,000 for 1860 and rose to nearly £29,000,000 in the war year 1866, became less than £3,000,000 in 1871, and only a little over £500,000 in 1874,' amounted in the aggregate for the fifteen years 1860-1874 to £166,000,000.
The principal stock is the consolidated 5 per cent.; its capital exceeds £320,000,000.
For the Prussian debt, see Cohn, §§ 488-94; Neymarck, 3-6.
See Bk. v. ch. 1, § 3.
Out of $70,000,000 war expenditure, $64,300,000 was met by loans, and $5,700,000 out of the tax receipts, or 92 per cent. and 8 per cent. respectively. Adams, Public Debts, 124.
The smallness of the debt in the period 1836-60 will be best realised from the fact that its capital amount rarely exceeded, and in several years was much under, the annual income of the Federal Government.
The following table shows the relations of loans to tax revenue in the years 1861-66. See Adams, 132.
Bolles, Financial History (1861-1885), 306. According to Prof. Adams, 'the interest-bearing obligations of the United States stood at their maximum in August, 1865, amounting at that date to $2,381,000,000.' Public Debts, 249.
See Noyes, Thirty Years of American Finance, chs. 9, 10.
The following figures show the position of the United States balances for the last fourteen years:—
A special 3 per cent. 'ten-twenty' loan of $198,000,000 was issued in 1898 for this war.
The highest point was in Nov. 1899.
On June 30th, 1901, the following were the several stocks:—
By March 1st, 1902, the capital charge was further reduced to $937,021,160.
The assets available against this charge are not easily valued. Much depends on the future policy of the State.
The settlement after the South African War will certainly double this figure.
Book V, Chapter V
End of Notes
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