Cyclopædia of Political Science, Political Economy, and the Political History of the United States
BANKRUPTCY, National. The private individual who borrows money, generally for productive purposes, is not always in a position to discharge his obligations to his creditors. Unforeseen circumstances may have interfered with his business operations; imprudence and bad faith may have diverted the loan from its rightful destination, and prevented the subsequent restoration of the capital he owed to the lender. What wonder is it then, that states which borrow nearly always for unproductive purposes, or even with destructive objects in view, have so often been placed in such a condition that it was impossible for them to meet their liabilities? The state has this poor advantage over the private citizen: no action at law lies against it, especially when its refusal to pay becomes general, and extends to all its obligations. In former times the state had, besides, the privilege of robbing its creditors without seeming to do so. To accomplish this, all it had to do was to debase the coinage Shortly after the first Punic war, the government of Rome reduced the as from twelve ounces of copper, which it contained, to two ounces only. With the sixth part of the sum which the government really owed, it thus paid the debts incurred during the war. This kind of legerdemain has been frequently practiced since the beginning of the Christian era. We can hardly mention a country that has not resorted to this sort of trickery at one time or another. It is still, to this day, a mode of liquidation or redemption which obtains in eastern countries. Sometimes governments made use of artifice in the matter. They debased the coinage, not by the manifest and tangible reduction of its weight, but by misrepresentation on its face. Sometimes, for instance, the government paid in silver crowns with a copper alloy of 40 per cent., a loan which had been contracted on the basis of crowns with an alloy of only 10 per cent. For some time this ruse prevented the inexperienced from detecting the fraud.
—The adulteration of the currency had the serious drawback of causing an endless series of dishonest acts by the inhabitants of the country. The adulterated money being used to settle private accounts, the national treasury was not the only defrauder; every creditor was robbed by his debtor. It was almost a step for the better when governments took the resolution to repudiate their debts more openly and heartlessly. They had the lamentable effrontery to carry this resolution into effect in the middle ages, and up to the eighteenth century. They borrowed as much as possible from the Lombards and the Jews, the great bankers and money lenders of that period, and then drove them out of the country as criminals, and confiscated their property. The compulsory conversion of the Jews to Christianity sometimes exempted them from expulsion. Their conversion, of course, saved their souls, but it saved neither the outstanding debts due to them nor their hoarded treasure. When the Lombards and the Jews had made room for native Christians in the financial marts, the national treasury met the claims of its creditors by periodical "blood-lettings," or forced levies on the property of the citizens. The most honest and upright ministers of the French monarchy, such men as Sully and Colbert, were not the least violent in the measures taken by them to reduce or cancel the indebtedness of the government; to pay its creditors in lettres de cachet by seizing their property and by sending them to work in the galleys The regency was inaugurated by the revival of the so-called chamber of justice, whose province it was to cause contractors, purveyors and other persons to disgorge the money they had received or were to receive from the national treasury. The restoration of this tribunal by the duke of Noailles, was preceded by the establishment of the visa-bureau, or auditor's office, whose "examination" of accounts reduced the floating debt from 600,000,000 francs to 250,000,000. It had been preceded, likewise, by the pretended monetary reform which debased, by one-fifth, the intrinsic value of the silver coin of the realm. Thus were different kinds of national bankruptcy introduced. Recourse was had to the same measures after the disastrous results of John Law's enterprise Subsequently the celebrated abbé Terrai, minister of finance, a man in every respect worthy the reign of Louis XV., proclaimed to the world the necessity and the legitimateness of a nation's going into bankruptcy at least once in every century. Before him, Richelieu had urged the expediency of a decennial re-examination of claims upon the national treasury. These claims, certainly, were not always genuine. Sometimes they were not very authentic, and emanated from suspicious sources; at other times they were burdened with exorbitant usurious interest. But, we may ask, was the lender here more guilty than the borrower? These shameful transactions could produce upon the public credit only one effect, namely, that of raising the premium charged for risk, which the lender then added to the price of money. The states which, like Great Britain and the United Provinces where the principles of liberty and equity prevailed, put an end to these perfidious practices, were the only ones that enjoyed good credit.
—But these bankruptcies, under the ancient régime, affected directly only a rather limited number of persons. They affected the contractors, large and small, to whom the treasury was indebted, the parties to whom these contractors had transferred the treasury's promises to pay, and other evidences of national indebtedness, together with the capitalists who had consented to make direct advances to the national treasury. In order that the bankruptcy of the treasury might become a really national calamity, and affect all citizens to a greater or less extent, a wider circulation of government paper was necessary, and it was necessary, above all, to discover a means of borrowing from the people generally without their consent. Paper money furnished this means. Modern history affords us several instances of this kind of public bankruptcy. There is the case of France, Austria, Spain, Mexico, and some of the states of the American Union. That of France and of Austria was the consequence of the events which followed the great French revolution. In both those countries the national bankruptcy affected the fundholders—the direct, voluntary creditors of the government, and also the holders of paper money—the indirect, involuntary creditors of the government.
—In France, the nation's bankruptcy grew out of the excessive issue of assignats. When, at last, the law of the 29th Messidor, year IV., did away with the compulsory circulation of the assignats, that is to say, with their circulation itself, since nobody accepted them voluntarily, the amount issued had reached the almost incredible figure of 45,578,810,040 livres—about $8,432,079,857. We can easily divine what was the value of this mass of waste-paper. The extent to which the assignats had depreciated was officially fixed by the law of the 5th Messidor, year V., proposed by the Conseil des Anciens "to devise rules to govern in the case of business transactions entered into while the depreciation of the currency lasted" According to the tabulated statement of the value of the assignats, drawn up for that purpose and which, be it remarked, rather extenuated than exaggerated their falling off in value, it appears that when the assignats were done away with at the beginning of the year 1796, 24 livres in specie brought from 5,000 to 7,000 livres in paper money. The law which authorized the issue of the mandats, of which 2,400,000,000 livres were issued between March and September, 1796, fixed their value at 30 times that of the assignats. In other words, 1,000 livres of the mandats represented 30,000 livres of the assignats, while the same thousand livres of mandats, as soon as they appeared in open market, were worth only from 100 to 120 livres in metallic money! This general bankruptcy was soon followed by another, less extensive in its character, and which involved the holders of government securities. It was called the Liquidation Ramel, after the cabinet minister who was the author of the law of the 24th Frimaire, year VI. This law provided that all perpetual and life annuities owed by the state, as well as all other state debts, old and new, should be redeemed to the extent of two-thirds, in vouchers payable to the bearer, with the superscription: Dotte publique mobilisée. As these vouchers, from the moment they were issued, lost from 70 to 80 per cent. of their value, it soon became impossible to keep them in circulation at all; and hence fundholders, pensioners, contractors and other creditors of the state lost two-thirds of their claims. Nor was the remaining third paid them. It was called the "consolidated debt," and bore 5 per cent. interest. This last third, known as the consolidated third, was the origin of the national debt of France.
—While France, recovered from the violent shocks caused by the revolution, was placing her own finances on a sound basis, the wars of the empire and the immense sacrifices which they entailed on all Europe, produced the greatest disturbance in the financial condition of other states. In England, where the sacrifices had attained fabulous proportions, these losses were borne with comparative ease, thanks to the inexhaustible resources of the country, and to its solid, well-established credit at home and abroad. It was otherwise in Austria, whose national wealth was not so fully developed, and whose finances were in an embarrassed state, even before the outbreak of the wars of the empire. When Joseph II ascended the throne the national debt amounted to 283,000,000 florins, and there were upward of 7,500,000 in bankozettel, or bank notes of a low denomination, in circulation. The war with Turkey swelled the debt to 372,000,000 florins, while the paper money circulation (circulation fiduciaire) rose to 28,000,000. The enormous expenses and the crushing reverses which attended the wars with Napoleon were Austria's total financial ruin, and obliged the government to have recourse to every possible expedient to raise money. At the beginning of the year 1811 the actual national debt had reached over 700,000,000 florins, and the paper money in circulation was largely in excess of 1,000,000,000 florins. This had so shrunk in value that 1,500 florins in paper were given in exchange for 1 florin in silver. After the peace of Vienna, which deprived the state of its finest provinces, Austria was less than ever in a condition to pay its debts. On Feb. 20, 1811, the imperial decree was issued to legalize, so to speak, de facto bankruptcy. The decree reduced the paper money (1,060,000,000 florins) and the baser coin (330,000,000 florins) to one fifth of their nominal value, and also lowered by one-half the interest on the consolidated debt. The paper money was withdrawn from circulation, and new vouchers were issued in its place (at the rate of 1 to 5 florins in bankozettel, bank notes,) the issue of which was never to exceed, in the aggregate, one-fifth of the bankozettel withdrawn from circulation. But this limit was soon exceeded in consequence of the wars of the years 1812 to 1815. In 1816 the amount issued had risen again to 639,000,000, while the paper money had depreciated to 28 or 29 per cent. of its nominal value. One hundred florins in bankozettel, replaced in 1811 by 20 florins in vouchers, were, therefore, worth in 1816 only 5 or 6 florins in specie. Advantage was taken of the creation of the national bank to bring order out of this state of chaos. The bank was authorized gradually to call in the paper money, and to substitute for it its own notes, convertible on presentation into specie. It was provided that 250 florins in paper money should be equivalent to 100 florins in specie. The holders of the evidences of the public debt were paid at the same rate.
—Is it necessary to call attention to the prodigious losses which such a catastrophe involved, and from which no class, we may say no individual, was exempt? There are writers who have striven to extenuate the gravity of national bankruptcy, and almost to give it the sanction of law. They argue that as the declaration of the fact of insolvency comes only as a consequence of the state's want of credit during a long period of time, and after a gradual depreciation of paper money, the loss in the end is really less heavy than it seems to be. The holder of the government paper at the fatal moment of the national bankruptcy, acquired it at a price quite as low as, perhaps even lower than the rate at which the insolvent treasury now holds it. Partial loss has long since been suffered by those through whose hands this paper has successively passed, while its holders, at the time of the bankruptcy, lose little or nothing. Even admitting this to be a fact, does it in any way extenuate the perfidy of bankruptcy in itself? Take the case of a merchant who fails with liabilities of a million. His financial condition or his bad faith has been suspected for two months, say, by his creditors; and they have sold his paper without indorsement, at a loss, let us suppose, of 50 per cent. Is his bankruptcy to be condemned any the less in law or morals, because, in this way, the loss of a million of which he has defrauded others is distributed among his original creditors and the buyers of his paper at a discount? The declaration of insolvency on the part of the state is not the only thing to be blamed and regretted; quite as deplorable and blamable is the loss caused by the gradual depreciation which precedes national bankruptcy itself.
—Fortunately the terrible evils which we have just mentioned are hardly possible in our day. Revolutions are less frightful and wars less protracted in our generation, than they were during the exceptional period from 1798 to 1816. Now, national resources are, as a rule, better developed, national finances are better managed, taxation and credit are better able to meet even exceptional demands. At the present time public opinion has more power to prevent unwise and ruinous outlays on the part of states. Barefaced national bankruptcy is left to such countries as Peru, Venezuela and Mexico. Still, cases of national bankruptcy, sometimes protracted in duration, occasionally occur in Europe. With the present system of public debts, when the principal is not paid and the interest alone represents to the capitalist the money he has loaned, the failure to pay accrued interest is an act of bankruptcy. When, for example, Spain refuses to pay the interest, or pays only a ridiculously small interest to a part of her creditors; or when Austria discharges in depreciated paper money the debts contracted on a metallic basis, they, in fact, repudiate the whole or a portion of the principal debt. The destruction of the debtor's credit is, and always will be, the first and inevitable consequence of such dishonesty. It is with the state as with the private individual: dishonest management is the costliest management. Hence, open or covert bankruptcy, be it total or only partial, is an abominable piece of speculation, and a wicked act as well. It is so in a higher degree in public affairs than in private transactions. With good laws, one might in some cases give credit even to a dishonest man. The law and the courts of justice will enable him to triumph over the bad faith of the latter. But it is not so in the case of the state. For the very reason that states have the power to be bad creditors, their desire to be honest should be above suspicion. Otherwise there could hardly be any national credit.
J. E. HORN.
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