Chapter 3 Part 3

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September 9, 2015

Soon after the Revolution, the government needed to borrow money from its subjects at a higher rate than common interest.

It had to be repaid in a few years. The funds to pay this interest were taxes on certain commodities. These taxes were at first laid on for a certain number of years, according to the term for which the money was borrowed. But these loans became perpetual by various arts of government.

The taxes became perpetual. Thus, the funds were mortgaged. They were made perpetual when money could no longer be borrowed on them. But they were still redeemable upon paying the money borrowed. The people would have been most shocked at the thought of the taxes being perpetual. But their progress was so insensible, that it was never murmured at. What shocks initially will soon become easy from custom. Custom sanctifies everything. Thus, the taxes were first laid. When money is lent to a private person, the creditor can come upon the debtor when he pleases for the capital and interest.

But when the government borrows money, they give you a right to a perpetual annuity of 3-4%. But it does not to allow you to re-demand your capital. It seems very odd that the creditor should consent that his money should never be paid up. But this is really his advantage. During wartime, the government has an immediate use for money. If you lend to the government £1,000 in wartime, they might be obliged to give you 5% interest. When peace comes, they continue your annuity which you can dispose of. You can often sell the annuity of your £1,000 at £1,100 or more because= your money is perfectly secure, and the government pays interest very punctually. The government finds that these annuities are sold above par. Since the funds were still redeemable, they take the advantage by= paying up the sums borrowed at 5%, and borrowing money at a lower rate. This made the contractors with the government be on their guard. They saw the government’s design. They would not lend the government any more money without some of the interest being irredeemable, perhaps 2% of the 4% they were to receive. Therefore, in every fund there was an irredeemable part. This made them continue to sell above par.

The funds rose and fell according to the government’s credit, during=

  • the reign of King William
  • the reign Queen Anne
  • the start of the reign of King George I

There was still some risk of a revolution then. Recently, there has been no danger of a revolution. But even in peacetime, stocks are sometimes at 10%, 20%, or even 50% below par. Sometimes, it is as much above it. Nobody risks losing that money by a change of government. How then do stocks fluctuate everyday without any visible cause? How does good or bad news influence the rising and falling of stocks? Every misfortune in war makes peace farther.

Every fortunate occurrence seems to favour the approach of peace.

When war continues, government necessities must be supplied=

  • more money must be levied.
  • New subscriptions must be opened.

In war, the interest must necessarily rise. Everyone is eager to be in the new subscription. Those who have annuities find it advantageous to sell the old stocks in prospect of a higher interest. Therefore, the number of sellers increases with the prospect of a war. Consequently, stocks fall. On the other hand, whenever there is a prospect of peace, there are no expectations that new subscriptions will be opened. Those who have annuities are not fond of selling them. Therefore, the number of sellers decreases and stocks rise. In wartime, everyone who has any stock runs to have it in the hands of the government, since it cannot be advantageously employed anywhere else. They get interest at 7% or 8%. 2% or 3% of this is perhaps [ir]redeemable. This is frequently a lottery ticket into the bargain. A person who has an annuity only at 3% will do all he can to sell it so that he may employ his stock more advantageously. This is why he will often sell it below par. Consequently, stocks fall. But in wartime, even the new subscriptions sell below par because of the following. Many big stockholders are merchants.

They keep their stocks in the government so that they can= be ready to sell out on any sudden demand, and take the advantage of a good bargain when it casts up. These chances occur most frequently in wartime. They often have occasion to sell out. Thus, more stock runs to the market. The new subscriptions sink below par. But in wartime, stock cannot be so advantageously employed. Everybody is tempted to subscribe. Even those whose circumstances are very inconsiderable, subscribe for great sums in the hopes that stocks will rise. They may sell out before the time of delivery, to great advantage. But they are often obliged to sell below par when= things do not answer their expectations, and they are forced to sell out one way or another to support their credit. In this way, the new subscriptions may fall. Stock-jobbers are well acquainted with their business. They observe when a number of indigent persons are in the subscriptions. Those persons are soon obliged to sell out. Stocks consequently fall. It is then their proper time to buy them.


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