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The Early Development of Public Debts in Europe

THE EARLY DEVELOPMENT OF PUBLIC DEBTS IN EUROPE.

which finds the transfer of the usance of capital advantageous (vol. i. sec. 418).

The resulting historical development takes the form of a suc cession of stages within the history of any given people, and the form of a succession of phases in the history of the various peoples concerned. The degree of industrial efficiency, the pro ductivity of industry and commerce, the degree of accumulation of capital, all these furnish the material basis for some one stage in the course of this development. Political and civil activities, as the visible manifestation of the degree of moral culture achieved, constitute the hyperphysical basis. The importance of this last factor is especially great, and is on the increase, within that sphere of credit where the state figures not simply as the keeper of the law, but is itself the recipient of loans—the field of public credit.

The stage of industrial and political development, both, therefore, decides what shall be the degree of development of public credit. The early development of credit in the city republics of Italy gave the first impetus to this growth in the modern European world ; and afterwards the other European states in succession, each in turn as it reached its prime, fol lowed the example of that ancient home of civilization. In this spread of public credit, as happens so often in analogous cases where a cultural advance is transmitted from one people to another, the hand of the business men and adventurers of the land of its origin was active in introducing the institution into foreign lands. The Italians taught the people of the North the unfamiliar methods of credit and of financiering, the lottery and the tontines ; adventurers bent on gain made the capitals of Europe the scene of their activity even as late as the close of the last cen tury. Indeed the great world-market of capital and of credit which has been supplying the world with loans for a century past still bears the name of those Lombards who came to England seven hundred years ago on the business of collecting tolls and taxes and of loaning money on the security of those sources of income.

§ 471. The business of the Italian campsores began quite early to extend itself beyond the simple exchange of coin (money changing in the strict sense), so as to include the making of remittances to distant places, and more especially to include the deposit business. It had been the custom for a long time past, traceable to the business methods of ancient Rome, to place money in banks for security. The deposits which accumulated in this fashion as depositum irregulare afforded the banker an opportunity to make a profit. The Roman-Canonical dogmas, however, forbade the derivation of any profit from such deposits on loans by the payment of interest, and the representatives of this doctrine, even as late as the middle of the seventeenth cen tury, were unable to find any justification for such interest. Hence arose the custom of entering such money nominally as a partnership investment, in which case a participation in the gains from the money would be legitimate, and so the partnership method gradually replaced the form of a deposit. These part nership banks are to be conceived of as a number of powerful and respectable family establishments, some of them very old, which played a very important part in the money market. The name Banckerii had gradually come to replace that of campsores.

At the same time there was in existence a deposit business in the strict, sense, which was even developing into the chief busi ness of the banks. This gave the state, as guardian of the public interests, and in much the same manner as the exchange business of the campsores formerly, occasion to require an official concession as a condition of doing. business ; whereby the state would have an opportunity to guard against frauds on the pub lic conscience on the part of the banks. From all this there resulted a supervision on the part of the state and a giving of bonds on the part of the banks ; all of which afforded the state a leverage for fiscal exactions.' In the case of Venice there is documentary evidence going back to the second half of the fif teenth century' to show that certain banking houses had loaned the state sums amounting to 1,200,000 ducats, for which they received no interest and, according to the views of that time, could not receive interest. Whenever the fiscal administration of the state was in a strait it seems to have turned to the banks as the most obvious resource. It is conceivable that the gov ernment's power of supervision and control over the city's com merce may have been made use of to indemnify the bank. But the banking business found the arrangement unprofitable ; the banks gradually came to refuse credit to anyone whom they sus pected of the intention of withdrawing the amount credited to him instead of letting it remain in the bank. So the govern ment enjoined the banks by law from declining to make any transfer that might be demanded.

§ 472. Besides this abusive conversion of the bank deposits to national loans there was also some borrowing of a permanent character. Since the doctrine on usury prohibited interest, the state paid " rents" in return for the loans, and these rents were secured by special branches of the national income.

The origin of the monies which were by accepted usage the means of placing these loans, and the relation of the monies to the development of the Italian banking system, have to this day not been thoroughly cleared up. It seems certain that, the rela tion was a close one. The common bond between them is the state's need of loans and its use of compulsion in order to secufe loans from private parties. The mons had this in com mon with the bank partnership, that both of them were in pos session of an accumulation of capital which was made up of a number of shares.

In the thirteenth century, it is said, the government of Flor ence having to pay a number of its own citizens a debt of sev enty marks in gold, and being without money, adopted the expe dient of assigning its creditors a fixed annual income to be paid but of the state's revenues, the rate being first fixed at 15 per cent. and then successively lowered to 10 and 5 per cent. Out of this beginning there grew up a permanent financial system ; the debt of the republic increasing in times of war and dimin ishing in times of peace. These annuities also became objects of purchase and sale, their price fluctuating, like that of other goods, according to the seasons, the fancy of purchasers, etc.' As in Florence, so in Genoa, Rome, Naples and other cities ; these fiscal institutions are said to have come into general use, gradually spreading over the country in the fourteenth and fifteenth centuries. The mantes pietatis (pawnbrokers' shops established for some charitable purpose) seem to have come into vogue later than these monies (projani).

The mantes are said to owe their origin, in Florence as else where, to forced loans (preestantine), but they presently came to be taken up to some extent voluntarily, as a business, by capital ists. The spread of this method of loans furnished occasion for the canonical doctrines to consider the question of its permissi bility. The voluminous literature of learned monks and jurists bears testimony to the importance and the prevalence of the monies in Italy. The inclination was, more and more, to admit the legitimacy of this method of loan. Ecclesiastical authori ties who ordinarily anathematized all countries and cities that borrowed and paid usury on their loans, advocated the full free dom of interest payment for the Florentine, Genoese and vene tian monies.

Then, during the course of the fifteenth and sixteenth cen turies, there is a typical development of the details of business methods in this fiscal institution, whereby the different permu: tations of chance and circumstance are exploited by means of a specialization of the mechanism. Data and experiences were carefully collected and then adopted as guiding principles for the routine of the business and handed on to later generations.

The annuities assigned to creditors were for the most part funded on particular sources of .public revenue. The shares of these annuities (appoints, loco montium) were adapted to the vary ing demands of purchasers. They were sometimes life annuities terminating at the death of the creditor (monies vacabiles), some times terminating only on repayment of the capital, and capable of being inherited (monies non vacabiles), these latter being com puted at a lower rate than the former ; sometimes the annuity was terminable at the instance of the creditor (monies redimibiles), sometimes (non redimibiles). The modification of the annuities which in the time of Louis XIV. was introduced into France and Northern Europe, and associated with the name of the Neapolitan Tonti, had long been well known in Italy (and in the German towns) -- the principle of this form of annuity being that the value of annuities falling void is to accrue to the surviving annuitants.

§ 473 The connection of these institutions with forced loans, which during their early days had served to exempt the sale of annuities from the canonical condemnation of usury, pres ently declined in importance. It came to be more and more a matter of interest voluntarily entered into between capitalists and the state. The popes themselves made use of it after the begin ning of the sixteenth century. The name employed (mons reli gionis, mons fidei), which carried a suggestion of the war against the infidel or of the defense of the faith in the protection of the city of Rome, and which was thus calculated to cover up whatever might be questionable about this money transaction,' this form of name gradually came to be accepted as the every day designation for those domains or taxes which were mortgaged to the state's creditors (mantes farinae, carnium, vim); or the loans were sometimes named for the popes who contracted them (mons Julius) or were designated by the length of time which the annuity had to run (mons novennalis). In the seventeenth century it was, especially in Rome, that the mantes came to be a perma nent institution ; about the middle of the eighteenth century these papal annuities were accounted an especially safe and pop ular investment.' The shares (loca mantis) became subject to inheritance and transfer. The state when in need of a loan watched its oppor tunity to place them advantageously on the market just as the various states have placed their bonds on the market in later times. The price of these loca fluctuated according to the for tunes of war and peace, and accordink to the security and pro ductiveness of the hypothecated sources of revenue.

An obvious further step was that this mortgaging of the future revenues from taxes and duties to the state's creditors should bring with it a leasing of these sources of revenue to the creditors, and a consequent collection of the taxes by farmers. The mans was therefore very often a tax-farming business, and the farmers of the taxes were a detested class of people in Italy, as they afterwards were in France and other countries.

About the close of the fifteenth and the beginning of the six teenth century, Macchiavelli testifies to the influence which public credit at that time had on the course of political affairs. When the Venetians entered into alliance with the King of Naples against Florence, Cosimo di Medici, by means of a loan opera tion, drained Venice and Naples of money to such an extent that those states were obliged to accept the terms of peace to them by Florence. And still the Medicis were only one of the wealthy families of Florence ; besides them there were many other families that were noted for enormous wealth. Great pro ductivity of industry, of trade and of the banking business on the one hand, and a standing mercenary army, frequent wars, large payments of tribute to the great states of the north, on the other hand, gave rise to the habitual use of credit by the Italian states and their capitalists.

§ 474 The German cities of the Middle Ages' also show a striking similarity in the evolution of their public credit to the city republics of Italy.

Even as early as the latter half of the fourteenth century (in Basle beginning 1365-66) municipal loans occur as a constantly recurring transaction, loans being taken up year after year. One reason for this is the fluctuations in public expenditures, the greater part of which cannot be fixed beforehand. If a war came on unexpectedly, or an opportunity to acquire prerogatives or domains, or to extend the municipal territory, then the public credit offered a means of supplementing the revenues. In this way the growth of political power was, here also, just as in the case of the Italian republics, largely bound up with the employ ment of public credit.

A second reason may (according to Sohm's hypothesis) have been the first reason offered being insufficient to explain the permanent character of these loans--that the city carried on a banking business in order to profit by the fact ( founded in law) that its credit alone was sufficiently stable for such a business. The city became a banker ; it looked upon the contracting of liabilities in the way of annuities and the like, not primarily as a means of covering extraordinary public expenditures, but as an ordinary constituent factor in the municipal administration ; because the city was in possession of a virtual bank monopoly for certain purposes, in much the same way as it possessed a legal monopoly of the salt business. Interest-bearing debt was here employed side by side with annuities ; debts with a high rate of interest were also converted into new debts with a lower rate of interest.

All this was of course useful as preparing the way for profit able employment of the municipal credit in case of public need, and served therefore as a substantial support of the city's polit ical power.' 475. The center of gravity of the world's trade shifted, during the era of discoveries, from Italy to the countries which lay on the new high road of the world and were able to seize the advantage of their position. There resulted a northern counterpart to the commercial prosperity of Italy in the Nether lands, whose gains were drawn from the more productive sources of the all-inclusive world market.

The money market of the Netherlands developed a luxuriant growth along the lines of the traditional fiscal methods, and at the same time brought forth new forms beside the old. The bourse of Amsterdam was, in the early part of the seventeenth century, a money market of the same significance for its day as the London money market became some 200 years later. The buying and selling of securities here for the first time developed to considerable proportions, with all the excitement and the excrescences of speculation. The business spread abroad about it an atmosphere of reckless thirst for gain, which presently led to the extension of the business methods of the exchange from transactions in securities to commercial transactions in all kinds of goods. A development which in point of technical efficiency is admirable, in point of morality problematical, and in its eco nomic bearings not fairly comprehended to this day.' The Dutch East India Company was founded in 1602. Its shares directly became such a favorite object of speculation on change that a decree of the States General was issued in 1610 prohibiting the sale of these securities in blank. The same thing was repeated in connection with the West India Company founded shortly afterward. The occasion for these prohibitions was the solicitude felt for the credit of the companies and for the state interests closely bound up with them. The extended participation of the public in investments of this kind is evident from these acts ; even in these early decrees there is mention of the property of widows and orphans, which was afterward so frequently declared to be bound up with the interests of these joint-stock companies.

In like manner as the investments of private individuals in the company's stock served to strengthen Holland's world-wide trade, so the same wealth invested in the state securities did service in the national struggle for a position as a political, and commercial power. What had been done on a small scale by the Italian republics and by the German towns at the height of the Middle Ages, repeats itself in the Netherlands on a much broader scale ; the public credit is constantly made to serve as a resource of the national finances and for carrying on war. The accumulation of capital and the security of the public credit both developed in such a high degree that the rate of interest declined in the course of the seventeenth century to the point at which it commonly stands in the wealthiest and soundest nations of today.' As early as the second half of the seventeenth century the rate of interest had declined to 3-2% per cent., and even the shares of the East India Company paid no more than per cent. This low rate of interest drove the superfluous capital to foreign countries, where it could obtain twice as much. In the American War of Independence Dutch capital fought both on the English and on the American side. Amsterdam sided with the one party, Rotterdam with the other. The greater risk of investments abroad made itself felt as -an advantage to the increasing national debts ; these served to keep the money from going out of the country and to bind the creditors to the state.

§ 476. The usual form in which national and municipal debts were contracted in the Netherlands, too, was the sale of annuities.

In this the earlier examples, which we are already acquainted with, were followed. But the occasion for so doing which was afforded by the canonical doctrine of usury was not present in this case the decisive reasons were reasons of financial admin istration. The annual payments were employed to cancel the principal of the debt. This form of payment moreover afforded an opportunity for a reduction of the rate of interest, of which the finance administration made profitable use. Under the Stadtholder Maurice the rate of interest in Holland and West Friesland was reduced from 6.25 per cent. to 5 per cent.; in 1655, under John de Witt, it was reduced from 5 to 4 per cent., in order to reorganize the finances and to lighten the burden on the citizens by redeeming the debt or to place new war loans on more advantageous conditions. This measure was of course not applied to the life annuities ; but these were looked on with all the more favor as canceling the principal of the debt in a short time. The principal of interest-reduction, too, found less appli cation in the eighteenth century, as the rate of interest on state loans had then fallen to 2.50 per cent.

With respect to the life annuities, the question was then com ing up as to whether the state or private enterprise had best take this branch of the insurance business in hand. Projects for carrying on the business by private enterprise were put forward as early as the close of the seventeenth century, but the private establishments for this purpose seem not to have been particu larly successful in the Netherlands.' Even as late as the close of the eighteenth century there is evidence that the business was thought very unfavorably of.' Tontines and life annuities, says. De Kooprurn, are good as state institutions ; as private undertakings they for the most part . profess to be charitable institutions, but their sole real basis is greed of gain, and in the most favorable cases the poor results are due to incompetence rather than to fraudulent management.

§ 477. As we approach the present we naturally turn to the country which at present is the center of the world's money market—Great Britain.

With the unity and centralization of its general development during the past eight hundred years this country affords us also in the growth of its national debt administration a clear and conspicuous example of the development of public credit, from infancy upward through many intermediate stages to the mature vigor based upon a controlling position in the world's commerce, which England inherited from the Netherlands, and then, since the close of the eighteenth century, strengthened and increased to gigantic proportions by the aid of the modern efficiency of industry. And all this rests upon a political system whose basis is not the narrow ground of a city republic or a collection of several city republics, but has all the breadth and scope of a great modern state.

Down to the closing years of the eighteenth century England was dependent on Dutch capital even for its public credit, so much so that during the English war against the American col onies the people of Amsterdam could seriously ask the question how long England would be able to go on paying interest on its debts. The stupendous effort put forth in the struggle against France was a marvelously successful test of England's wealth of capital and of its credit ; so that after the great war closed lish capital was already in position to render the same service to the states of the continent as Holland had rendered to England shortly before. During the progress of the American war every successive loan was obtained on more onerous terms than the next preceding ; quite the contrary was the case during the war at the close of the century, when every successive loan was obtained on easier conditions.' And when, in 1783, a man of great consequence exclaimed : " Either the nation must put an end to its debts or the debts will put an end to the nation,"' the historian of English finances, Sir John replied with prophetic words, then as he did twenty years later : " Posterity will laugh at the foolishness and shortsightedness of the states men of today who venture to assert that we have entirely exhausted our resources." § 478. But it is a long way that has to be accomplished before this point is reached. Want, violence, breach of faith, straitened finances, these are the conditions amidst which the evolution must proceed for centuries before the requisite legal basis of public credit and the free movement of capital which comes of law and order can be achieved.

So long as the authority of the sovereign, like all other public authority during the Middle Ages, is still encumbered with the swaddling bands of private law and private-law rela tions, so long does the public credit also continue to lie latent under the form of the king's private credit, and this latter bears all the characteristic marks of its time, in the way of indebted ness and pecuniary- straits. The first king whose debts history records is Henry III. ; he had pawned everything, crown jewels, robes of state, even the casket containing the relics of St. Edward ; he was so beset with debts that he could scarcely appear in public without being assailed by the shouts of his creditors ; he is even reported to have publicly declared his want to be so great that it would be a greater deed of charity to give money to him than to a beggar at the door.

A hundred years later Edward III. (1340) disclosed to Parlia ment that he had borrowed so much money on his personal security while abroad that in case it were not repaid he would be obliged to return to Brussels and stay there as a pledge to his creditors. The grandson of Edward III., Richard II., was the first king' who applied to Parliament for aid in raising the money necessary for a campaign against France. But in vain ; the Lords declared that they were willing to accompany him to the war in person, but they had no money, and the merchants were unwilling to lend except on the most unquestionable secu rity. A further attempt to raise the required sum (6o,000) from foreign merchants by granting them the privilege of trade in England failed, and so the war had to be given up. Among the grievances on which the deposition of this king was based there stands out prominently the complaint that he had extorted money under pretense of borrowing.

Henry V. succeeded in obtaining from Parliament (1416) a subsidy of £6o,000 to cover pressing necessities in the war in France. But as it was feared that the money would not come in fast enough, the attempt was made to borrow the money on hypothecation of the subsidy, at the same time giving three royal princes as hostages. Scarcely one-fourth of this loan could be obtained ; the king was obliged to mortgage the crown and the crown jewels to raise the remainder.

§ 479 With Henry VII. and the House of Tudor begins a new era.

The fiscality introduced by him was violent in the means it employed and hypocritical in its professions, but profitable to the commonwealth in its substantial effects, and it gradually reduced the public finances to order. Henry VII. left behind him a national treasure of L'1,800,o00. By an exercise of sagac ity in the punctual payment of debts he improved his credit. Henry VIII., it is true, repeatedly resorted to the dubious expe dient of having a pliant Parliament absolve him from his obliga tions. But the modern order and method of things comes more clearly into the foreground, in this department also, under Eliza beth's rule. In 1575 the Chancellor of the Exchequer was able to assure Parliament that the whole of the old debt, which went back at least four years before the death of Henry VIII., had

been paid, with interest ; and that Her Majesty's credit had hereby grown stronger both at home and abroad than that of any other prince, because she had kept her word to everybody, which many princes had not done. In return for this the queen desired that her prerogative of granting monopolies should be left intact, as being "the most beautiful flower in her garden and the richest jewel of her diadem." For this purpose she also revived an old law, of the second year of Richard II., which recognized the right of the crown to levy forced loans and left the decision as to what constituted a "reasonable excuse" in the discretion of the crown. For this purpose she had to go into the money markets of the continent—Hamburg, Cologne, Ant werp—and pay high interest ( To-12 per cent.) even for small sums, which could even then be obtained only on the security of the City of London and the personal security of her own min isters. Such was the case until the increasing wealth of the country, the parsimony of the administration and the growing credit of the crown made capital available at home. The turbu lent times of the seventeenth century involved the English national credit in vicissitudes of the same kind as the rest of the political system. This came to a close with the Revolution of 1688, and an orderly system then began to be introduced into the management of the public debt, such as to inspire its historian with the conviction,' quite in the spirit of the time, that Henry V. would never have been hindered in his glorious campaign by lack of funds if the system of funded debts had been in existence in his time.

§ 480. The struggle against the French power in Europe and in the colonies, the struggle against the independence of the English colonies, and, finally, the struggle against the French republic and empire, were the causes which kept the English national credit on the stretch throughout the course of the eighteenth century and down into the beginning of the nine teenth, and so occasioned the search for and the finding of new resources in the use of it. These sources of revenue only grad ually reached the full productivity which they had at the begin ning of the nineteenth century. The stability of the public credit, as well as the country's wealth of capital, had to develop for a full hundred years before the point of saturation was reached, before the state could stand independently on its own credit and the country on its own domestic capital.

The reign of William III. opened amidst financial difficulties which had been aggravated by the war. The English were not accustomed to heavy burdens of taxation, and "did not know that no nation has ever enjoyed civil and political liberty with out paying dearly for these blessings." Moreover, the custom ary revenues declined in consequence of the war. The same taxes which yielded net receipts of £2,000,000 before the Revo lution, yielded in 1693 only 41,100,0oo, and in 1695 only £812, 00o. Of taxes previously in existence, the hearth money alone had been remitted ; new duties and excise taxes had been intro duced, which in 1693 yielded not half a million, so that the aggregate receipts of earlier times were not nearly equaled. The growth of political parties was one cause of this result. Dave nant computes that the sudden changes in the administration of the excise, due to the revolution in political parties (to cite one out of a great number of instances in the national administration), brought about a decrease of more than one quarter of a million pounds. Great defalcations came to light. In 1701 the lower house found it necessary to pass a resolution that : "It is noto rious that many millions have been paid to His Majesty for public purposes without their being, so far, accounted for in any way." We can comprehend the necessity of the debts that were incurred, even without resorting to the explanation afterwards brought forward by Bolingbroke that they were incurred in order to bind the propertied classes to the new government. In 1710, writes Davenant, the government was in the position of a debtor reduced to such extremities that the creditors were squeezing the very blood out of it ; the citizens had withdrawn from trade and given up commerce because the wars inter fered with the business, and had become usurers, lending their money to the government. As early as 1697 Parliament passed a law to control the brokers, who were put under oath in order to remedy the ill consequences of the unfortunate traffic in securities.

§ 481. At the outset the form of public credit employed was that in vogue under Charles II.; the taxes granted by Parliament were anticipated by pledging them. Presently a change was made to the system of rents or annuities, patterned after the Dutch model. In 1692 an attempt was made to borrow one million by this method, on annuities to run ninety-nine years, at 10 per cent. until 1700, and 7 per cent. after that date ; but it was impossible to raise the full amount on these conditions. The following year one million was borrowed on annuities of sixteen years' term, with annual payments of 14 per cent. and a lottery feature added. Life annuities were also sold (at 14 per cent. to terminate with the life of a single person, at 12 per cent, for the life of two persons, and 10 per cent. for three, no regard being had to the age of the person taking up the annuity). The lottery also came into vogue ; the opposition, even at that time, styled it the destroyer of industry and sobriety, and ascribed to the Dutch the intention of undermining the virtue and thrift of the English by introducing this institution among them. In 1697 the Chancellor of the Exchequer, Montagu, invented the excheq uer bills, issued to some extent in denominations of five and ten pounds, as an expedient for remedying the scarcity of money while the recoinage was going forward. The government bor rowed from the Bank of England and the East India Company, on occasion of granting them their privileges, 1.2 million and 2 million pounds respectively, for which they received 8 per cent. interest. The entire national debt at the close of 1701 amounted to 16.4 million pounds, and the annual interest charge on the debt to 1.3 million pounds. Only so much of this was accounted a permanent debt as was borrowed from the two companies above mentioned, together with a sum of .66 million pounds carried over from the reign of Charles II.

Anticipation of future tax revenues and the sale of annuities remained the staple forms of public credit. The rate of interest declined gradually ; at times during the reign of Queen Anne it was only 6-5 per cent. By the end of 1714 the permanent debt to the companies (to which had now been added the South Sea Company) amounted to 20.50 million pounds ; to which is to be added annuities to the amount of 26 millions (one-half of this being lottery annuities of thirty-two years' term) ; and finally there was a floating debt of five million pounds, which it was esti mated might be converted into a funded debt of an additional two millions. The debt therefore aggregated 54 million pounds, with an interest payment of 3.35 million pounds.

Next followed several decades of improvement in the national credit and of decrease of the debt. At the close of 1727 the debt amounted to 52 millions, with an interest charge of 2.2 mil lions ; by the end of 1739 it was only 47 millions, with a yearly charge of 1.96 millions. In 1737 Sir John Barnard was able to submit a scheme for reducing the interest on the greater part of the redeemable annuities from 4 to 3 per cent., a measure which was adopted ten years later.' The 3 per cent. stock, during the succeeding years, stood nearly at par, never below 89. About this time it became the fashion to issue stock with an integral rate of interest and at a fluctuating price ; the 3 per cent. secur ities continued to be used even at a later time, when the state could sell these securities only at a discount of 4o or 5o per cent. The use of life annuities and lotteries still continued, especially in seasons of great expenditure and straitened finances ; they were held to contain something of the nature of douceurs to the creditors, spices to tickle the palate of the investing public. Also loans from the privileged companies, who received in return new privileges or an extension of the term of the old, continued to be a fiscal expedient which could be of but relatively slight profit to a state whose credit was good. In return for the exten sion of the privileges of the East India Company for fourteen years (1766-80), the state received at 3 per cent. interest ; this was in 1743 when 3 per cent. stock stood at 97.

§ 482. From this time on heavier demands on the state's credit occur from time to time, on account of war expenditures ; the heavier demand pushes the rate of interest up above the nor mal rate of 3 per cent., sometimes very considerably ; but greater and greater sums were continually demanded, and the influence of this demand to injure the national credit grew relatively less as time went on. Contemporaries were readily led to see only the dark side of these increasing burdens ; but for the historian it is not to recognize a great advance in the fact that such increasing burdens could be borne at all, and that a con stantly increasing strain on the public credit can be met. More than that, from the historical point of view it is possible to see the mutual relation of cause and effect between this increasing capacity of the public credit and the increasing demands of the state ; it is possible to perceive that these national demands could not have grown as they have done if the state had not had such a credit to fall back on.

The Seven Years' War (1755-1762) burdened the nation with a yearly interest charge of 2.5o million pounds, but at the close of the war the country was in a flourishing condition. The American War of Independence with its consequences, during the years 1776-1784, created a new interest charge of 5.2o mil lions, so that the entire interest charge by that time amounted to 9.70 millions, and the principal of the debt to 257 millions. But during the years 1793-1801 alone the debt increased by 327.50 million pounds (face value, for 215.40 millions actually received). And finally, during the years 1802-1815 the debt increased by 26o million pounds.

During the period 1793-1815 the taxes rose by a steady pro gression from 20 million pounds to 72 million pounds. We can appreciate the magnitude of this burden of taxation if we call to mind that it is only very lately (since 1883) that an annual amount of 72 million pounds has been raised by taxation in Great Britain ; and this after an interval of seventy years, during which the popu lation of Great Britain (exclusive of Ireland) has increased from 12.50 millions to 31 millions, and the country's wealth increased in an unparalleled manner, while at the same time the value of money has very appreciably declined.

§ 483. During the severest test to which the national credit of England has been subjected, the appeal to the public credit was accompanied by a remarkable strain on the people's tax paying capacity. A hundred years before that time the govern ment was engaged in great financial efforts to cancel its debts.

In the course of development of its credit every civilized state reaches a point where the necessity of redeeming its debt is no longer present to the thoughts of its creditors. It is the point at which, in the course of history, the public credit diverges in its essential character from that of private credit, where con fidence in the permanence, the immortality of the state (as con trasted with the physical person) comes to prevail. The neces sity previously present, of providing for the claims of creditors by securing the redemption of the debt in some specific way, is replaced by a free choice of redeeming the debt or not. Annu ities with a short term and life annuities have, in England, since the beginning of the eighteenth century given place to long-term (ninety-nine years') annuities and the like. The ever-recurring and ever-increasing need of loans swells the aggregate sum con tinually until it has now become an important duty of the finan cial administration to take thought and put a stop to its over growth by a systematic payment of the debt.

Radical schemes for this purpose were brought forward as early as the times of Queen Anne and George I. The expedient of a reduction of interest was first applied on a large scale by Robert Walpole, when, in 1716, he converted the 6 per cent. debt to a 5 per cent., and with such success as to have no need of the capital which he had secured from the bank for the operation. This conversion made so favorable an impression even on the creditors that one of the largest capitalists told the minister' that while he lost in the rate of interest it seemed to him that h capital was all the more securely invested. His operation had appended to it a provision that the sum hereby saved in interest was to apply to the redemption of the debt, and from this measure, therefore, dates the sinking fund.

The principle of the sinking fund is a statutory provision imposed by the government upon itself as if to bring the external pressure of the law to bear upon the vacillations of the times and of its own resolutions. It is a good resolution seeking support in a formal declaration, and continues to be practiced until it presently appears from experience that this formality is too feeble to resist the force of circumstances, though it may be strong enough to act as a vexatious obstruction.

From 1716 to 1728, for example, 2.70 million pounds of the debt was canceled, but in the next succeeding years new needs came up, so that in 1732 Walpole himself was constrained to cover the shortage in the land tax (which he had reduced in order to gain the support of the landlords) by taking half-a-mil lion from the sinking fund. So (wrote Price at a later time the sinking fund, the only hope of the nation, was murdered prema turely and cruelly by its own father.

§ 484. The superstitious belief in the mechanism of the sink ing fund retained such a hold, however, that even as late as 1783 an authority in finance could assert that it was immaterial how high a rate of interest a nation had to pay for its debts, inasmuch as the higher the interest the sooner will a properly organized sinking fund cancel the principal. Eminent authorities in finance, though differing somewhat in detail, were enthusiastic for the plan,—Sinclair, Price, the younger Pitt. Price created some thing of a sensation by his mathematical exposition of the scheme ; Sinclair was agreed with him in the astounding calculation by which he showed that the state, by means of a sinking fund of one million a year at compound interest, would in sixty years cancel a principal of 317 millions of 3 per cent. stock. Pitt clothed the idea in the form of law and made one of his eloquent speeches in the House of Commons (March 29, 1786) in support of the proposition that "a sum of one million annually be granted the Commissioners of the Sinking Fund to be applied to the purchase of national securities with a view to discharging the public debt of the country." This contrivance had been the wish and the hope of all men, said Pitt ; he himself was proud that his name was to be inscribed on this strong pillar of the national credit and prosperity. A few years later these brave hopes were brought to grief by the war which Pitt waged against France, and the national expenditures which it involved.

Even as early as 1772 a reply to Price's, scheme had well remarked that taxes are taken not from a dead, insensible fund, but from the living source of the labor and tax-paying capacity of the people.' Sinclair had himself anticipated the bolder objec tion that the increase of the wealth of the English people which went hand in hand with the increase of the debt might make it more advantageous to apply the amount to the promotion of industry and wealth under state supervision instead of to the sinking fund,' and had in this connection made a sharp attack on Adam Smith, in defense of what the latter had named the Mer cantile System.

The most effective method for reducing the debt during the first half of the eighteenth century continued to be that adopted by Walpole in 1716, namely, the reduction of the rate of inter est, effected by terminating the terminable bonds and by conver sion. But when the 3 per cent. rate had been reached it became the custom to regard this as the normal rate and grdually to bring the entire debt formally to this rate, in spite of any fluctua tions of credit. Sinclair criticises the loans placed during the war of 1755-62 because they were issued at 3 per cent, interest and much below par.' If these debts had been contracted at a high rate of interest, according to Sinclair, the country might have saved 12.50 millions; since it would in that case have been possible to borrow at a lower rate after the return of peace, and so pay off the old debt.' 485. As a contrast to the mature development of public credit which England shows us during this era, we will turn now to the youngest among modern civilized states, youngest in point of political power as well as in the development of its industry and credit, but for our purposes practically the most important, viz., the Prussian state.

While Great Britain exhibits the characteristic features of a stable and productive national credit as early as the first half of the eighteenth century; while that country came out of the Seven Years' War in a flourishing condition at the middle of the century, after having contracted enormous loans ; while it was able even during the first half of the eighteenth century to relieve its finances by a reduction of interest that resulted in the adoption of 3 per cent. as the normal rate, and its retention for a cen tury-and-a-half since ; while it has consequently outgrown all the primitive methods of covering extraordinary expenditures of the state, and retains but a single one of the expedients handed down from earlier stages of growth—the suspension of specie payments by the Bank of England on February 26, 1797— an expedient which, even at the end of another century, has not been made obsolete by the financial development of the most advanced nations ; while all this is true of England, a comparison (which will carry us several centuries backwards in English history) will show us the youthful German nation meeting the fiscal demands of its struggle for national existence by means that belong to an essentially earlier period.

The expenses of the first two Silesian wars' were for the most part defrayed out of the war treasure which Frederick William I. had left to his son, amounting to 8.70 million thalers. To this is to be added funds in the two treasuries of more than one mil lion thalers. But 1.50 million thalers in plate, which the royal palace contained, also gradually took their way into the melting pot and were converted into coin. The King contracted a debt of 1.35 millions to the Electorate for the second Silesian war, which he discharged after the close of the war. Preparatory to the third war there had again been (1756) accumulated in the treasury a sum of 13.38 millions, and a new loan of 3.57 millions was had from the Electorate. Apart from about one million con tained in the " new " treasure, and set apart for the mobilization of the army, the funds with which the great war was begun amounted to 18 million thalers. These funds were exhausted by the end of 1757.

§ 486. The fiscal expedient which was next resorted to is a barbaric one. It marks the cultural level of a state with no credit and struggling for existence with brute violence. Resort was now had to debasement of the coin. First gold and then silver coins of light weight were struck, in the expectation that a debasement carried out in secret pass unnoticed on the strength of the confidence which the Prussian coins had earned, and with the further intention of sparing the home country as far as possible and of issuing the money in the territory of the enemy. Any scruples entertained by the king and the higher officials as to this measure affected the result but slightly; more than half a-thousand years earlier the German Emperor, Frederick II., had aptly characterized the curse of uncertainty of the coinage in a rescript to the citizens of Nuremberg.' But the necessity of the state was pressing. The contrast at this point with England and Holland is as instructive for the historical study of the public credit as it is serviceable for the pedagogic purposes of the reformer. While the debasement of the coin by Frederick the Great was aimed at the neighboring German states, it is to be added that these states presently found themselves tempted to meet him and even outbid him on this treacherous field. In Wurtemberg, on the Rhine, in hither Pomerania, in Brunswick, etc., the governments sought to make head by the use of the same expedient against the inundation of Prussian coin. Quite naturally, in the course of the long continued war, the Prussian countries were also not spared the infliction of the debased coin. After the close of the war the light-weight coin was formally rated at its bullion value, and as a measure of transition a "new Brandenburg money " was introduced, which was to be employed in the discharge of the obligations entered into before March i, 1759, but at a rate 41 per cent. above its nominal value.

The officials suffered in an especial degree from this calamity. Since the close of 1757 they had received no payment of salary, but only treasury certificates to be redeemed upon the return of peace, which declined in value constantly from year to year. In 1763 the redemption of these certificates began, but only in the "new Brandenburg money" in which for the time being cur rent payments of salaries were also paid (consequently at 4o per cent. reduction).

Besides the debasement of the coin, some help was also derived from war contributions (which fell especially on Saxony and Mecklenburg), from the English subsidies ( £670,000 annu ally, 1758-61), and finally from the quasi-contributions of cor porations within the country. Under this latter head are to be named the loans which the king obtained from all bishoprics and chapters, from the towns, and, towards the close of the war, from the provincial estates of Magdeburg.

§ 487. After the war the financial policy of the great king was permeated by the conviction that more effective provision must be made against such exigencies in the future. He saw such a provision in the accumulation of a national treasure which should go farther than the last one. He sought a means for the accumulation of such a treasure in a more effectual administration of the excise and the tax monopolies ; into which he introduced the more highly developed methods of foreign countries and which he to some extent supplemented with fiscal expedients that—as, e. g., the lotteries —had been discarded by more advanced states, especially by England.' By 1766 the greater treasure of the king contained 18 million thalers and the petit treasure over one million. Down to 1780 the great treasure increased till it nearly reached the sum of 32 millions ; at the same time the petit treasure, destined for the mobilization of the army, had received 4.33 millions. In 1786 Frederick II. left behind him a national treasure aggregating 55 million In the meantime he had carried on the war of the Bavarian succession, which, according to the king's own account, had cost 17 millions. During the later years of his reign the national income reached a yearly net average of nearly 20 million Of this 2-3 millions were turned over to the treasure ; for military expenses during the years 1784-1786 12.50 millions a year were appropriated, for the civil service and the court not quite 4 millions, for the crown about 220 thousand thalers.

Income and expenditure remained in somewhat the same relation under Frederick's successor. During 1786-1796 about one million yearly, on an average, was turned in to the national treasure. But the art of carrying on wars and still replenishing the national treasure had, as so much else, disappeared with Frederick the Great. The unsuccessful wars against France, in

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