A Treatise on Political Economy

Jean-Baptiste Say
Say, Jean-Baptiste
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C. R. Prinsep, trans. and Clement C. Biddle., ed.
First Pub. Date
Philadelphia: Lippincott, Grambo & Co.,
Pub. Date
6th edition. Based on the 4th-5th editions.
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Of the Contracting Debt by National Authority, and of its general Effect.


There is this grand distinction between an individual borrower and a borrowing government, that, in general, the former borrows capital for the purpose of beneficial employment, the latter for the purpose of barren consumption and expenditure. A nation borrows, either to satisfy an unlooked-for demand, or to meet an extraordinary emergency; to which ends, the loan may prove effectual or ineffectual: but, in either case, the whole sum borrowed is so much value consumed and lost, and the public revenue remains burthened with the interest upon it.


Melon maintains, that a national debt is no more than a debt from the right hand to the left, which nowise enfeebles the body politic. But he is mistaken; the state is enfeebled, inasmuch as the capital lent to its government, having been destroyed in the consumption of it by the government, can no longer yield any body the profit, or in other words, the interest, it might earn, in the character of a productive means. Wherewith, then, is the government to pay the interest of its debt? Why, with a portion of the revenue arising from some other source, which it must transfer from the tax-payer to the public creditor for the purpose.


Before the act of borrowing, there will have been in existence two productive capitals, each of them yielding, or capable of yielding, revenue; that is to say, a capital about to be lent to government, and a capital whereon the future tax-payers derive that revenue, which is about to be applied in satisfaction of the interest upon the capital lent. After the act of borrowing, there will remain but one of these capitals; viz. the latter of the two, whereof the revenue is thenceforward no longer at the disposal of its former possessors, the present tax-payers, since it must be taken in some form of taxation or other by the government, for the sake of providing the payment of interest to its creditors. The lender loses no part of his revenue: the only loser is the payer of taxes.


People are apt to suppose, that, because national loans do not necessarily occasion any diminution of the national money or specie, therefore, they occasion, not a loss but merely a transfer, of national wealth. With a view to the more ready exposure of this fallacy, I have subjoined a synoptical table, showing what becomes of the sum borrowed, and whence the public creditor's interest is satisfied.*112


When a government borrows, it either does or does not engage to repay the principal. In the latter case, it grants what is called a perpetual annuity. Redeemable loans are capable of infinite variety in the terms. The principal is contracted to be repaid, sometimes gradually, and in the way of lottery; sometimes by instalments payable together with the interest, sometimes in the way of increased interest, with condition to expire on the death of the lender; as in the case of tontines and life-annuities, whereof the latter determine on the death of the individual lender; whereas, in tontines, the full interest continues to be divided amongst the survivors, until the whole of the lives have expired.


Tontines and life-annuities are very improvident modes of borrowing; for the borrower remains throughout liable to the full rate of interest, although he annually repays a part of the principal. Besides, they savour of immorality; offering a premium to egotism, and a stimulus to the dilapidation of capital, by enabling the lender to consume both principal and interest without fear of personal beggary.


The governments best acquainted with the business of borrowing and lending have not, of late years at least, given any engagement to repay the principal of the loan. Thus, public creditors have no other way of altering the investment of their capital, except by selling their transferable security, which they can do with more or less advantage to themselves, according to the buyer's opinion of the solidity of the debtor government, that has granted the perpetual annuity.*113 Despotic governments have always found a great difficulty in negotiating such loans. Where the sovereign is powerful enough to violate his contracts at pleasure, or where there is a mere personal contract with the reigning monarch, with a risk of disavowal by the successor, lenders are loth to advance their money, without a near and definite period of payment.


The appointment to posts and offices, under condition of an annual payment, or of deposit for which the government engages to pay interest, is a mode of borrowing in perpetuity, in which the loan is compulsory. When once this paltry expedient is resorted to, it requires very little ingenuity to find plausible grounds, for converting almost every occupation, down to the dust-man and street-porter, into patent and saleable offices.


Another mode of borrowing is, by the anticipation of revenue by which is meant, the assignment by a government of revenues not yet due, with allowance in the nature of discount, the taking up money in advance from lenders, who charge a discount proportionate to the risk they run from the instability of the government and possible deficiency of the revenue. Engagements of this kind contracted by a government, and satisfied either out of the revenue when collected, or by the issue of fresh bills upon the public treasury, constitute what bears the uncouth English denomination of floating debt; the consolidated debt being that, whereon the creditor can demand the interest only, and not the principal.


National loans of every kind are attended with the universal disadvantage of withdrawing capital from productive employment, and diverting it into the channel of barren consumption; and, in countries where the credit of the government is at a low ebb, with the further and particular disadvantage, of raising the interest of capital. Who can be expected to lend at 5 per cent. to the farmer, the manufacturer, or the merchant, while he can readily get an offer of 7 or 8 per cent. from the government? That class of revenue which has been called, profit of capital, is thereby advanced in its ratio, at the expense of the consumer: the consumption falls off, in consequence of the advance in the real price of products; the productive agency of the other sources of production are less in demand, and consequently worse paid; and the whole community is the sufferer, with the sole exception of the capitalist.


The ability to borrow affords one main advantage to the state, namely, the power of apportioning the burthen entailed by a sudden emergency among a great number of successive years. In the present state of public affairs, and on the present scale of international warfare, no country could support the enormous expense from its ordinary annual revenue. The larger states pay in taxation nearly as much as they are able; for economy is by no means the order of the day with them; and their ordinary expenditure seldom falls much short of the income. If the expenditure must be doubled to save the nation from ruin, borrowing is usually the only resource unless it can make up its mind to violate all subsisting engagements and be guilty of spoliation of its own subjects and foreigners too. The faculty of borrowing is a more powerful agent, than even gun-powder; but probably the gross abuse that is made of it, will soon destroy its efficacy.


Great pains have been taken, to find in the system of borrowing, as well as in taxation, some inherent advantage beyond that of supplying the public consumption. But a close examination will expose the hopelessness of such an attempt.


It has been maintained, for instance, that the debentures and securities, which form a national debt, become real and substantial values, existing within the community; that the capital, of which they are the evidence or representative, is so much positive wealth, and must be reckoned as an item of the total substance of the nation.*114 But it is not so; a written contract or security is a mere evidence, that such or such property belongs to such an individual. But wealth consists in the property itself, and not in the parchment, by which its ownership is evidenced; therefore à fortiori, a security is not even an evidence of wealth, where it does not represent an actual existing value, and when it operates as a mere power of attorney from the government to its creditor, enabling him to receive annually a specified portion of the revenue expected to be levied upon the tax-payers at large. Supposing the security to be cancelled, as it might be by a national bankruptcy, would there be any the least diminution of wealth in the community? Undoubtedly not. The only difference would be, that the revenue, which before went to the public creditor, would now be at the disposal of the tax-payer, from whom it used to be taken.


Those who tell us, that the annual circulation is increased by the whole amount of the annual disbursements of the government,*115 forget that these disbursements are made out of the annual products and are a portion of the annual revenue, taken from the tax-payer, which would have been brought into the general circulation just the same, although no such thing as national debt had existed. The tax-payer would have spent what is now spent by the public creditor; that is all.


The sale or purchase of debentures or securities is not a productive circulation, but a mere substitution of one public creditor in place of another. When these transfers degenerate into stock-jobbing, that is to say, the making of a profit by the rise and fall of their price, they are productive of much mischief; in the first place, by the unproductive employment on this object of the agent of circulation, money, which is an item of the national capital; and, in the next, by procuring a gain to one person by the loss of another; which is the characteristic of all gaming. The occupation of the stock-jobber yields no new or useful product; consequently having no product of his own to give in exchange, he has no revenue to subsist upon, but what he contrives to make out of the unskilfulness or ill-fortune of gamesters like himself.


A national debt has been said to bind the public creditors more firmly to the government, and make them its natural supporters by a sense of common interest; and so it does, beyond all doubt. But, as this common interest may attach equally to a bad or a good government, there is just as much chance of its being an injury, as a benefit to a nation. If we look at England, we shall see a vast number of well-meaning persons, induced by this motive to uphold the abuses and misgovernment of a wretched administration.


It has been further urged, that a national debt is an index of the public opinion, respecting the degree of credit which the government deserves, and operates as a motive to its good conduct, and endeavours to preserve the public opinion, of which such a debt furnishes the index. This can not be admitted without some qualification. The good conduct of government in the eyes of the public creditors, consists in the regular payment of their own dividends; but in the eyes of the tax-payers, it consists in spending as little as possible. The market-price of stock does, indeed, furnish a tolerable index of the former kind of good conduct, but not of the latter. Perhaps it would be no exaggeration to say, that the punctual payments of the dividends, instead of being a sign of good, is in numberless instances a cloak to bad, government; and, in some countries, a boon for the toleration of frequent and glaring abuses.


Another argument in favour of national debt is, that it affords a prompt investment to capital, which can find no ready and profitable employment, and thus must, at any rate, prevent its emigration. If it do, so much the worse: it is a bait to tempt capital towards its destruction, leaving the nation burthened with the annual interest, which government must provide. It is far better that the capital should emigrate, as it would probably return sooner or later: and then its interest for the mean time will be chargeable to foreigners. A national debt of moderate amount, the capital of which should have been well and judiciously expended in useful works, might indeed be attended with the advantage of providing an investment for minute portions of capital, in the hands of persons incapable of turning them to account, who would probably keep them locked up, or spend them by driblets, but for the convenience of such an investment. This is perhaps the sole benefit of a national debt; and even this is attended with some danger; inasmuch as it enables a government to squander the national savings. For, unless the principal be spent upon objects of permanent public benefit, as on roads, canals, or the like, it were better for the public, that the capital should remain inactive, or concealed; since, if the public lost the use of it, at least it would not have to pay the interest.


Thus, it may be expedient to borrow, when capital must be spent by a government, having nothing but the usufruct at its command but we are not to imagine, that, by the act of borrowing, the public prosperity can be advanced. The borrower, whether a sovereign, or an individual, incurs an annual charge upon his revenue, besides impoverishing himself to the full amount of the principal, if it be consumed; and nations never borrow but with a view to consume outright.

Of public Credit, its Basis, and the Circumstances that endanger its Solidity.


Public credit is the confidence of individuals in the engagements of the ruling power, or government. This credit is at the extreme point of elevation, when the public creditor gets no higher interest, than he would by lending on the best private securities; which is a clear proof, that the lenders require no premium of insurance to cover the extra risk they incur, and that in their estimation there is no such extra risk. Public credit never reaches this elevation, except where the government is so constituted, as to find great difficulty in breaking its engagements, and where, moreover, its resources are known to be equal to its wants; for which latter reason, public credit is never very high, unless where the financial accounts of the nation are subject to general publicity.


Where the public authority is vested in a single individual, it is next to impossible, that public credit should be very extensive: for there is no security, beyond the pleasure and good faith of the monarch. When the authority resides in the people, or its representatives, there is the further security of a personal interest in the people themselves, who are creditors in their individual, and debtors in their aggregate character; and therefore, can not receive in the former, without paying in the latter. This circumstance alone would lead us to presume, that now, when great undertakings are so costly as to be effected by borrowing alone, representative governments will acquire a marked preponderance in the scale of national power, simply on account of their superior financial resources, without reference to any other circumstance.


In one light, the obligations of government inspire more confidence than those of individuals, that is to say, by the greater solidity of its resources. The resources of the most responsible individual may fail suddenly and totally, or at least to such an extent, as to disable him from performing his engagements.


Numerous commercial failures, political or national calamities, litigation, fraud or violence, may ruin him entirely; but the supplies of a government are derived from such various quarters, that the individual calamities of its subjects can operate but partially upon the revenue of the state. There is also another thing, that facilitates the borrowing of government even more than the credit it is fairly entitled to; and that is, the great facility of transfer presented to the stockholder. Public creditors always reckon upon the possibility of withdrawing by the sale of their debentures, before the occurrence of embarrassment or bankruptcy; and, even where they contemplate such a risk, generally consider some advance of the rate of interest a sufficient premium of insurance against it.


Moreover, it is observable, that the sentiments of lenders and indeed of mankind upon all occasions, are more powerfully operated upon by the impressions of the moment, than by any other motive; experience of the past must be very recent, and the prospect of the future very near, to have any sensible effect. The monstrous breach of faith on the part of the French government in 1721, in regard to its paper-money and the Mississippi share-holders, did not prevent the ready negotiation of a loan of 200,000,000 liv. in 1759; nor did the bankrupt measures of the Abbé Terrai in 1772 prevent the negotiation of fresh loans in 1778 and every subsequent year.


In other points of view, the credit of individuals is better founded than that of the government. There is no compulsory process against the latter, for the breach of its engagements; nor do governments ever husband the national resources with nearly the care and attention of individuals. Besides, in the event of external or internal subversion, individuals may withdraw their property from the wreck much better than governments can.


Public credit affords such facilities to public prodigality, that many political writers have regarded it as fatal to national prosperity. For, say they, when governments feel themselves strong in the ability to borrow, they are too apt to intermeddle in every political arrangement, and to conceive gigantic projects, that lead sometimes to disgrace, sometimes to glory, but always to a state of financial exhaustion; to make war themselves, and stir up others to do the like; to subsidize every mercenary agent, and deal in the blood and the consciences of mankind; making capital, which should be the fruit of industry and virtue, the prize of ambition, pride, and wickedness.


A nation, which has the power to borrow, and yet is in a state of political feebleness, will be exposed to the requisitions of its more powerful neighbours. It must subsidize them in its defence; must purchase peace; must pay for the toleration of its independence, which it generally loses after all; or perhaps must lend, with the certain prospect of never being repaid.


These are by no means hypothetical cases: but the reader is left to make the application himself.


By the establishment of sinking-funds, well-ordered governments have found means to extinguish and discharge their redeemable debt. The constant operation of this contrivance contributes more than any thing else to the consolidation of public credit. The mode of proceeding is simply this:


Suppose that the state borrows 100 millions of dollars at an interest of 5 per cent.; to pay that interest, it must appropriate a portion of the national revenue to the amount of 5 millions of dollars. For this purpose, it usually imposes a tax calculated to produce this sum annually. If the tax be made to produce somewhat more, say 5,462,400 dollars, and the surplus of 462,400 dollars be thrown into a particular fund, and laid out annually, in the purchase of government debentures to that amount in the market, and if, moreover, in addition to this surplus, the interest likewise upon the debt thus extinguished, be annually employed in such purchases, the whole principal debt will be extinguished at the end of fifty years. This is the mode in which a sinking-fund operates. The efficacy of this expedient depends upon the progressive power of compound interest; that is to say, the gradual augmentation of the interest of capital, by the addition of interest upon the arrears of interest, reckoned from certain stated periods.


It is obvious, that, by an annual instalment of not more than 10 per cent. upon its own interest, the principal of a debt bearing an interest of 5 per cent. may be extinguished in less than 50 years. However, the sale of the debentures being voluntary, if the holders will not sell at par, that is to say, at 20 years purchase, the redemption, in this way, will take somewhat longer time; but this very state of the market will be a convincing proof of the high ratio of national credit. On the other hand, if the credit decline, so that the same sum will purchase a larger amount of debentures, the extinction of the debt will be effected in a shorter period. So that the lower public credit falls, the more powerful is the operation of a sinking-fund to revive it; and that fund grows less efficient, exactly in proportion as it becomes less requisite.


To the establishment of such a fund, has the long-continued public credit of Great Britain been attributed, and her ability still to go on borrowing, in spite of a debt of more than 800 millions sterling.*116 And doubtless this it is, that has made Smith declare sinking-funds, which were contrived expressly to reduce national debt, the main instruments of their increase. Had not governments the happy knack of abusing resources of every kind, they would soon grow too rich and powerful.


A sinking-fund is a complete delusion, whenever a government continues borrowing on one hand, as much as it redeems on the other; and à fortiori, when it borrows more than it redeems, as England has constantly done, since the year 1793 to the present time. Whencesoever the amount of the sinking-fund be derived, whether it be merely the product of a fresh tax, or that product, augmented by the interest on the extinguished debt, if the government borrow a million for every million of debt that it pays off, it creates an annual charge of precisely the same amount as that extinguished: it is precisely the same thing, as lending to itself the million devoted to the purpose of redemption. Indeed, the latter course would save the expense of the operation. This position has been fully established in an excellent work, by professor Hamilton,*117 which is quite conclusive upon the subject. The enormous burthens of the people of England, the scandalous abuse its government has made of the power of borrowing, and her substitution of paper-money in place of specie, will have produced some benefit at least; inasmuch as they have assisted the solution of many problems, highly interesting to the happiness of nations, and given warning to all future generations, to beware of the like excesses.


It must be evident, that the grand requisite to the efficiency of a sinking-fund is, the punctual and inviolable application of the sums appropriated to the purpose of redemption. Yet this has never been rigidly adhered to, even in England, where consistency and good faith to the creditors are a point of honour with the government. So that English writers put no faith in the extinction of the debt by the operation of the sinking-fund: nay, Smith makes no scruple of declaring, that national debts have never been extinguished except by national bankruptcy.


It has been sometimes a matter of speculation, to inquire into the effect of a national bankruptcy upon the relative condition of individuals, and the internal economy of the nation. In ordinary cases, when a government commits an act of bankruptcy, it adds to the revenues of the tax-payers the whole amount that it discontinues paying to the public creditors.—Nay, it goes somewhat further: for it remits likewise the charges of collection and management of the revenue and the debt. A nation burthened with 100 millions of annual interest on its debt, whereon the charges above mentioned should amount to 30 per cent.*118 more, might by a bankruptcy remit to the tax-payers 130 millions, while it stript its creditors of 100 millions only.


In England the effect would be more complicated; because she does not pay the dividends on her debt wholly out of the annual proceeds of taxation; at least, not at the moment of my writing; but annually borrows a sum nearly equal to the interest of her debt.*119 Were she to commit an act of bankruptcy, the annual loans of 40 millions sterling, more or less, would be withdrawn from unproductive consumption by the public creditors, and be applicable to the purposes of re-productive consumption: for it may fairly be supposed, that the capitalists who accumulate and lend to the state, would look out for some profitable investment. In this point of view, the operation would tend vastly to the increase of the national capital and revenue: but the execution would be attended with very disastrous immediate consequences: for this annual amount of 40 millions would be withdrawn from the class of consumers, who have no other means of subsistence, and would be utterly unable to make good their losses in any other way, for want of both personal industry, and of the command of capital.


A bankruptcy would probably obviate the necessity of fresh loans; but would not release an atom of the former taxation, where the interest of the debt is habitually paid, not with the proceeds of taxation, but with new loans. Thus, the burthens of the people would not be alleviated,*120 nor the charges of production reduced: consequently there would be no sensible reduction in the price of commodities; nor would British products find a readier market either at home or abroad.


The classes liable to taxation would be diminished in numerical strength, by the whole of the suppressed stockholders; and taxation less productive, although not lower in ratio. The 40 millions of revenue, withdrawn from the public creditors, would pay taxes only upon the annual profit or revenue, they might yield in the character of productive capital. The ruin of the public creditors would be attended with abundance of collateral distress; with private failures and insolvency without end; with the loss of employment to all their tradesmen and servants, and the utter destitution of all their dependants.


On the other hand, if she persevere in borrowing to pay the interest of the former loans, that interest and with it taxation also, must go on increasing to infinity. It is impossible to avoid a precipice, when one follows a road that leads nowhere else.


The potentates of Asia, and all sovereigns, who have no hopes of establishing a credit, have recourse to the accumulation of treasure. Treasure is the reserve of past, whereas a loan is the anticipation of future revenue. They are both serviceable expedients in case of emergency.


A treasure does not always contribute to the political security of its possessors. It rather invites attack, and very seldom is faithfully applied to the purpose for which it was destined. The accumulation of Charles V. of France fell into the hands of his brother, the duke of Anjou; those which pope Paul II. destined to oppose the Turkish arms, and drive them out of Europe, supplied the extravagancies of Sixtus IV. and his nephews. The treasures amassed by Henry IV., for the humiliation of the house of Austria, were lavished upon the favourites of the queen-mother: and, at a later period, we have seen the political power of Prussia brought into imminent hazard by those very savings, which were destined by Frederick III. to its consolidation.


The command of a large sum is a dangerous temptation to a national administration. Though accumulated at their expense, the people rarely, if ever profit by it: yet in point of fact, all value, and consequently, all wealth, originates with the people.

A Table, Showing the Result of Value Lent to the State.


General Fund, whence all Revenue is derivable; consisting of the Total Natural Agency, Capital and Industry, at the command of the Nation, divided into four equal portions, whereof respectively each Individual is supposed to possess a share, proportionate to his Wealth. Of this stock, the only part applicable to the purpose of a National Loan, is the transferable or floating value, capable of acting as capital.


I. yielding revenue consumable by the proprietor himself. brace bracket These three portions yield but two of revenue; portion II. being absolutely extinct.
II. yielding nothing; being lent to, and consumed by the state revenue.
III. yielding revenue transferred to, and consumable by, the lenders of Portion II.
IV. yielding revenue applicable to any purpose.

A table, showing the comparative condition of France, Great Britain and Ireland, and the United States of America, in respect to Population, Debt, and Taxation, at the close of the year 1831.


Population. Debt. Revenue.
France 32,560,000 $1,036,800,000 $187,200,000
Britain and Ireland 24,304,000 3,756,802,723 247,075,200
United States 13,200,000 24,322,235* 28,526,820*
* These two sums only include the public debt and revenue of the Federal Government, at the period referred to, and not the debts and revenue of the different States of the Union. To show the comparative condition of the people of the United States, with those of France and Britain, in respect to debt and taxation, at the time mentioned, it would be necessary to add the debts and revenue of the respective States, which, however, at this time, we have no means of doing. American Editor.

Notes for this chapter

Vide App. A.
In the next section it will be explained how an unredeemable debt may be extinguished by purchase at the market price.
Considerations sur les Advantages de l'Existence d'une Dette publique, p. 8.
The transferable nature of these securities does not invest them with the properties of money, since they do not act in that capacity. But the use of convertible paper, as money, operates to create a positive addition to the total national capital; because, but for their agency in the transfer of value in general it must be executed by specie, or some equally substantial item of capital. Government debentures of stock require money to circulate them, instead of acting themselves as money.
In a note, here subjoined, the author stated the amount of the British national debt, in the year 1815, on the authority of a speech made in parliament in February, of that year, by the chancellor of the exchequer, Mr. Vansittart. We now have it in our power, in place of the note in question, to furnish the reader with an exact statement of the British national debt, from its commencement, at the revolution of 1688, to the 5th of January, 1832. The abstract we give is extracted from the Tables to Part II. of "Pebrer on the Taxation, Debt, Capital, Resources, &c. of the whole British Empire," a work which we before had occasion to refer to, and of the highest statistical authority.

Pounds sterling.
National debt at the revolution, 1688, 664,263
Increase during the reign of William and Mary, 15,730,439
Debt at accession of Anne, 1702, 16,394,702
Increase during reign of Anne, 37,750,661
Debt at accession of George I., 1714, 54,145,363
Decrease during reign of George I., 2,053,128
Debt at accession of George II., 1727, 52,092,235
Decrease during the peace, 5,137,612
Debt at commencement of Spanish war, 1739, 46,954,623
Increase during the war, 31,338,689
Debt at end of Spanish war, 1748, 78,293,312
Decrease during the peace, 3,721,472
Debt at commencement of war, 1755, 74,571,840
Increase during the war, 72,111,004
Debt at conclusion of the peace, 1762, 146,682,844
Decrease during the peace, 10,739,793
Debt at commencement of American war, 1776, 135,943,051
Increase during the war, 102,541,819
Debt at conclusion of American war, 1783, 238,484,870
Decrease during the peace, 4,751,261
Debt at commencement of French revolutionary war, 1793, 233,733,609
Increase during the war, 295,105,668
Debt at peace of Amiens, 1st February, 1801, 528,839,277
Increase during the second war, 335,983,164
Debt at peace of Paris, 1st February, 1816, 864,822,441
Decrease since the peace, 82,155,207
Debt on 5th January, 1832, £782,667,234
Equal to 3,756,802,723 dollars.

American Editor.

On the National Debt of Great Britain. 8vo., Edinburgh, 1813.
In England and the United States they are not nearly so high in proportion: but the ratio is even higher in some states that shall be nameless.
Colquhoun, Wealth, Power, and Resources of the British Empire, 4to. London, 1814. Stokes, Revenue and Expenditure of Great Britain, London, 1815. Should a continuance of peace enable her to square her income with her annual expenditure, inclusive of the interest of her debt, it would still afford no relief, but merely arrest the further progress of the evil.
Economy in the national expenditure is the only thing that can mitigate the pressure of taxation upon the British nation; yet were economy enforced, how is that system of corruption to be upheld, through which the interest of the minister of the day regularly prevails over that of the nation?

End of Notes


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