Front Page Titles (by Subject) CHAPTER XV.: On Public Loans. - Letters to Mr. Malthus, and A Catechism of Political Economy
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CHAPTER XV.: On Public Loans. - Jean Baptiste Say, Letters to Mr. Malthus, and A Catechism of Political Economy 
Letters to Mr. Malthus, on Several Subjects of Political Economy, and on the Cause of the Stagnation of Commerce. To Which is added, A Catechism of Political Economy, or Familiar Conversations on the Manner in which Wealth is Produced, Distributed, and Consumed in Society, trans. John Richter (London: Sherwood, Neely, and Jones, 1821).
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On Public Loans.
With what view do governments borrow money?
To provide for extraordinary expences which the ordinary revenues are not sufficient to discharge.
How do they pay the interest of the loans they borrow?
They pay it either by laying on a new tax, or by economising, from the ordinary expences, a sum sufficient to pay the annual interest.
Loans, then, are a means of consuming a principal of which the interest is paid by a portion of the taxes?
Who are the lenders?
Individuals who have capitals at their disposal.
Since government represents the society, and society is composed of individuals, it is then the society which lends to itself?
Yes: it is a part of the individuals who lend to the whole of the individuals; that is to say, to the society or to its government.
What effect is produced by public loans on the public riches? Do they augment or diminish them?
The loan in itself neither increases nor diminishes them: it is a value which passes from the hands of individuals to the hands of the government, a simple transfer. But as the principal of the loan, or, if you will, the capital lent, is generally consumed in consequence of this transfer, public loans produce an improductive consumption, a destruction of capital.
Would not a capital thus lent have been equally consumed if it had remained in the hands of individuals?
No: the individuals who lent the capital, wished to lay it out, not to consume it. If it had not been lent to government it would have been lent to those who would have made use of it, or they would have employed it themselves; thus the capital would have been consumed reproductively instead of improductively.
Is the total income of a nation increased or diminished by public loans?
It is diminished, because all the capital which is consumed carries with it the income which it would otherwise have gained.
But in this case, the individual who lends does not lose any income, since the government pays him interest for his capital; and if he does not lose, who does?
Those who lose are the contributors who pay the increased taxes, with which the public creditor is paid his interest.
But if the creditor receives on the one hand an income which the contributor pays on the other, it appears to me that there is no portion of income lost, and that the state has profited by the principal of the loan which it has consumed.
You are in an error; and to convince you of it we will examine how this operation is effected. An individual lends to the state a thousand pounds. Consequently he draws this value from an employment in which it was already, or in which it would have been engaged. Supposing that this employment would have afforded five per cent. there is an income of fifty pounds taken from the society. It is nevertheless paid to the creditor; but how is it paid? At the expence of a contributor; of a landed proprietor, who would have used for his own purposes these fifty pounds which the government takes from him to pay the creditor. Instead of two incomes which there was in society, that of the thousand pounds lent to government (which either had been, or might have been placed elsewhere) and the income of the funds, which had produced to the landholder the fifty pounds of contribution, which he has been compelled to pay to satisfy the creditor. In lieu of these two incomes, there remains but one, namely, the last, which is transferred from the contributor to the creditor. Why is there only one income of fifty pounds where there had been formerly two? Because there had been, beside the funds of the contributor, another fund of one thousand pounds, producing fifty pounds, which has been lent and consumed, and which, consequently, produces nothing.*
What are the principal forms under which a government pays the interest of its loans?
Sometimes it pays a perpetual interest on the capital lent, which it does not bind itself to repay: the lenders have in this case no other means of recovering their capital than to sell their debt to other individuals who desire to place themselves in the situation of the former.
Sometimes it borrows, by way of annuity, and pays the lender a life interest.
Sometimes it borrows on condition of repayment, and it stipulates a pure and simple repayment, in a certain number of years, by instalments; or a reimbursement of the principal sum at periods which are sometimes determined by lot.
Sometimes it negociates bills on its agents, the receivers of contributions. The loss which it suffers by discount represents the interest on the advances it receives.
Sometimes it sells public offices, and thus pays interest for the money furnished. The incumbent can never get back his principal without selling his office. The price of offices is often paid under the name of security.
All these modes of borrowing have the effect of withdrawing from productive employment capitals which are consumed in the public service.
Have not the government the means of paying their debts, even those of which it has promised to pay the interest perpetually?
Yes; by means of what is called a sinking fund.
What is a sinking fund?
When a tax is laid upon the people to pay the interest of a loan, it is laid a little heavier than is necessary to pay this interest; this excess is confided to what are called commissioners for the management of the sinking fund, and who employ it every year to buy up at the market price a part of the interest or annuities paid by the state. As the same interest always continues to be paid, the sinking fund devotes in the year following, to the purchase of these interests, not only the portion of the tax which is devoted to this use in the first instance, but also the interest which it has already bought up. This manner of extinguishing the public debt by its progressively increasing action, would extinguish it with sufficient rapidity if these sinking funds were never diverted from this object, and if the debts were not kept up by a perpetual addition of new loans, which bring annually into the market more interest than the sinking fund buys up.
[* ]See in my Treatise of Political Economy, 2d edit. book. iii. c. 9. a synoptical table of the progress of these values.