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11: Blows Directed Against Commerce: Every Type of Government Borrowing - Étienne Bonnot, Abbé de Condillac, Commerce and Government Considered in their Mutual Relationship [1776]

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Commerce and Government Considered in their Mutual Relationship, translated by Shelagh Eltis, with an Introduction to His Life and Contribution to Economics by Shelagh Eltis and Walter Eltis (Indianapolis: Liberty Fund, 2008).

About Liberty Fund:

Liberty Fund, Inc. is a private, educational foundation established to encourage the study of the ideal of a society of free and responsible individuals.


11

Blows Directed Against Commerce: Every Type of Government Borrowing

In the time of our cities, justice was administered in the simplest fashion, that is to say, with few laws and few magistrates. Under the monarchy, laws proliferated with tribunals, magistrates and henchmen of every kind.

Of all the causes which contributed to this abuse, there is only one which enters into my scheme: it is the creation of a host of offices; a creation from which the sovereigns obtained money.

In a monarchy the offices of the magistracy must be venal; since if they were not, intrigue would sell them, and the administration of justice would be plunder.

But, to sell them himself, the sovereign must not multiply efficient offices beyond the need for them, even less create useless ones. If it is a source of income for him, it is only temporary, and it remains charged with debt for eternity. Because an office he sells is rightly a loan, whose interest he pays under the name of wages.

However, when our four monarchs had found this income, they abused it to the point that the magistrates were often obliged to pay out to avoid the tribunals being overburdened with an excessive number of useless members. But this expedient, instead of producing the expected result, was yet another way for the sovereign to make money. So they paid up, and some time later new offices were created.

The nobility was exempt from a large part of the taxes. This ridiculous exemption, which is inexplicable among peoples who were agricultural in their origins, such as those I assume, is easily explained among peoples who were barbarous in origin.

Since the ancient nobles were exempt from taxation, people wanted to become noble to share this prerogative with them; and offices were created simply to sell nobility.

Then the people found itself more and more overburdened. Not only did it bear as an additional burden all the load that the ennobled commoner no longer bore; it also had new taxes placed on it to pay the wages of the new offices.

One would tire of seeing the four monarchs using the same means to make money. But then they had many which they gave up by turn and to which they returned at long intervals.

They especially found great resources in the privileged companies. These had credit. The monarchs borrowed from them, sometimes at 10, 15, 20 per cent, sums which the companies normally borrowed at 5.

At first the people did not deem these loans to be a new expense for it. It did not see that it was itself contracting debt when the sovereign borrowed. However, a part of the taxes was transferred to pay interest to the companies; and soon after, new taxes were imposed to equate tax receipts to total expenditure.

These loans were an endless expense for the state; an expense that was all the greater, as a part of the interest each year went abroad to foreigners who had also lent. The government did not abandon this income but it created another in the borrowings on life annuities; and to tempt greed it thought up tontines. It congratulated itself on contracting debts that snuffed themselves out, and on having found the secret of taking money from the citizens without doing violence to anyone.

This expedient, like all the others, placed it in the need to multiply taxes so as to balance income and expenditure; and it had to lay heavy taxes, as its debts were great. It is true that the debts died out; but the taxes remained; and they were piled up, because life annuities or tontines kept on being created. This operation which had no end filled the towns with idle, useless people who nevertheless lived at the state’s expense.

The companies, in borrowing to lend to the king, had spread among the public an amazing number of bills payable to the bearer and carrying interest at 5 per cent. There were ones of fifty ounces of silver, of a hundred, of a thousand, so as to make it easy for everyone to have the means of lending.

This paper currency seemed to put great impetus into the circulation, and people thought themselves wealthier. With lands, it was said, one always has repairs to carry out: a poor crop takes away some of one’s income, and one often has a lot of trouble getting paid by one’s farmers. Besides, if the circumstance occurs of an exceptional expense, one cannot take it from one’s capital, and there is difficulty in borrowing. But, with a portfolio, one has stock which pays well at maturity; and since, if needed, one can sell some bills, one can always face up to misfortunes.

You can imagine what a blow this new way of thinking delivered to agriculture. Land fell in price. Losses in livestock were not made good: farms were allowed to fall into ruin: farmers were harried for payment; and people bought bills. One needed to have a huge money surplus to contemplate buying an estate: and when a person had done so, he thought of ways of getting a lot out of it without putting anything back.

However, the state’s debts were growing, and the companies, which the government repaid poorly, could no longer keep their undertakings. Then the government put itself in their place and declared that it would pay for them, that is to say, it reduced the rate of interest on public paper from 5 to 4 per cent, to 3, to 2, finally to nothing. Then the ruin of a great many individuals, who had previously been rich, brought down with it a crowd of traders. One saw no more than bankruptcy on bankruptcy; and people learnt that it is not the same with papers, which only have a pretended value, as it is with gold and silver, which have a real value.

People ought at least to have learnt the lesson. But wealth in paper was so convenient that they only sought to deceive themselves; and after a while they again received it with confidence. It seemed that people did not know what to do with their silver.

We have seen how a banker put to work for his own account the funds that several traders entrusted to him. Now let us assume that bankers, rich in silver and especially in credit, associate and form a joint fund to exploit for their mutual profit. This association is a company which will give each of its members a written recognizance of the sum that each of them has provided. This promissory note or bill will be called a share [action] since it gives a title on the bank’s funds called an action in legal terms.

I assume that the capital of this bank amounts to a hundred thousand ounces of silver, and that to make its circulation easier, this capital has been split into a thousand shares, each of a hundred ounces.

These shares will yield 5, 6 per cent, sometimes more, sometimes less, according to the bank’s profit. The more they yield the more they will gain favour; and there will soon be several thousands of them among the public.

Every owner of a share has a credit on the bank and finds several advantages in it. The first is security for his money that he is afraid to keep on his premises. The second is the interest he will draw on it, interest which may grow from one day to the next. The third is to be able to place in small portions, and over the length of time he chooses, all the money he will not use for the moment. The fourth is the convenience of being able to pay large sums by the simple conveyance of these claims. The last is to hide one’s property in a wallet, and only to show it when one wants people to see it. These advantages, which everyone weighed up according to his whim, could cause shares originally valued at a hundred ounces to rise to a hundred and ten, a hundred and twenty, a hundred and thirty, etc.

The bank, which wanted to respond to the public’s eagerness, sold these shares, I assume, for a million ounces of silver. Now it does not need to have this million in hand, because, so long as it is trusted, it is confident that the shareholders will not all come at the same time to ask for their money. It will be enough for the bank to keep sufficient to pay those who will be in the position of needing ready money; and this will be, for example, a hundred thousand ounces, more or less, according to the circumstances.

These shares, like all other negotiable bills, gained or lost value depending on the eagerness with which they were sought after. If many people wanted to buy them, and few wanted to sell them, they rose in price: they fell, on the other hand, if many people wanted to sell, and few wanted to buy them. Sometimes a rumour, true or false, which will cause a loss to the bank will spread alarm and everyone will want to sell: at other times a rumour, just as true or false, will restore confidence, and everyone will want to buy. With these possibilities stock-jobbing will become the profession of many of those persons who will only be busy spreading confidence and alarm by turns. The bank itself, when it is confident of being able to re-establish its credit, will let it fall at intervals so that it can practise jobbing its own shares. It will buy them when it has caused them to fall: it will re-sell them when it has caused them to rise again.

The government could borrow from this bank, and it borrowed at high interest rates. But it turned it to its account in another way. The government had paper which was losing heavily; in particular the revenue farmers’ bills had fallen massively on all markets. It obliged the bank’s directors to create shares, whose value they had not received, and with these shares it caused the revenue farmers’ bills to be bought. Immediately these bills rose in price. People rushed for them: they rose still more. The rumours that were sown maintained the public delirium; and people rushed all the more to buy them as they believed they must always rise. When, by this manipulation, the bills had been made to rise above par again, the bank’s directors sold them to withdraw the exceptional shares that they had created, and they withdrew them with profit. So it was that in turn the bank’s bills and the tax farmers’ bills were promoted: sometimes the latter were good, sometimes the former; and the public did not perceive that all were bad.

It was only left now for the government to bank on its own account, and it did so. When it had borrrowed from the bank to the point where it could no longer pay, it took the place of the bankers. Then it created more shares, and it did so all the more, as it believed that in future the paper would serve it in place of silver.

These shares, multiplied to excess, fell in price from one day to the next. Soon no one bought any more, and the shareholders demanded their capital. Much skill was now required. A great display of gold and silver was made. However, payment was made slowly, with the excuse that everyone could not be paid at once; and trusted persons came to receive huge sums in public which they secretly took back to the bank. But though such deceits could be repeated, they could not always succeed. The collapse of the bank in the end produced a general upheaval.