Chapter 3d

French Annuities

by Adam Smith Icon

36 In France, the seat of government is not in a great mercantile city.

Merchants do not make up the people who advance money to government. The lenders for all public exigencies are made mostly of:

  • finance people
  • tax farmers general
  • non-farm tax receivers
  • court bankers, etc.

Such people are commonly very wealthy and proud men of mean birth. They are too proud to marry their equals. Women of quality disdain to marry them. They frequently resolve to live as bachelors. They do not have families of their own nor much regard their relatives’ families. They desire only to live in splendour during their own time. They are willing that their fortune should end with themselves.

There are much more people in France who are averse to marry, or feel marriage to be inconvenient or improper, than in England.

Such people have little or no care for posterity. It is most convenient for them to exchange their capital for a revenue that will last as long as they wish.

37 The ordinary expence of most modern governments in peacetime is nearly equal to their ordinary revenue.

When war comes, they are unwilling and unable to increase their revenue to match their expence. Governments fear of offending the people. The people would be soon disgusted with the war because of the sudden increase of taxes.

Governments do not know what taxes can produce the needed revenue. The facility of borrowing delivers them from the embarrassment brought by this fear and inability. Through borrowing, they can raise money from year to year with very moderate tax increases. Through perpetual funding, they can raise the largest sum with the smallest tax increases. In great empires, the people who live far from the action feel no inconvenience from the war. They enjoy reading the exploits of their own fleets and armies in the newspapers. To them, this amusement compensates the small difference between the wartime taxes and the peacetime taxes. They are commonly dissatisfied with the return of peace. It ends their amusement, hopes of conquest, national glory from a longer war.

38 The return of peace seldom relieves them from most of the wartime taxes.

These taxes are mortgaged for the interest of the debt contracted for the war. If the new taxes produce some surplus after paying the debt’s interest, this revenue might be converted into a sinking fund for paying off the debt. This often fails because= This sinking fund is altogether inadequate for paying the whole war debt within a reasonable time. This fund is almost always applied to other purposes.

39 The new taxes were imposed only to pay the interest.

They are not intended nor expected to produce more. Any surplus would seldom be very considerable. Sinking funds generally arose more from a reduction of interest than from any surplus of taxes. Holland’s sinking fund in 1655 and that of the ecclesiastical state in 1685 were formed this way. Hence the usual insufficiency of such funds.

40 During peacetime, various events require an extraordinary expence.

Government finds it always more convenient to defray this expence by misapplying the sinking fund than by imposing a new tax. Every new tax is immediately felt by the people. It always creates some murmur and is met with some opposition. The more taxes are created, the higher the taxation. The more loudly the people complain of every new tax, the more difficult it becomes to= find out new subjects of taxation, or raise the current taxes.

A momentary suspension of the debt payment is not immediately felt by the people.

It creates no murmur or complaint. Borrowing from the sinking fund is always an obvious and easy way to gett out of the present difficulty. The more the public debts are accumulated, the more necessary it is to study to reduce them. The more dangerous it is to misapply the sinking fund. The less likely the public debt is reduced, the more likely it is for the sinking fund to be misapplied towards defraying all the extraordinary peacetime expences. When a nation is already overburdened with taxes, only the need of a new war, fueled by national vengeance or anxiety, can induce people to submit to a new tax. Hence the usual misapplication of the sinking fund.

41 In Great Britain, from the start of perpetual funding, the public debt reduction in peacetime was never proportional to its accumulation in wartime.

Great Britain’s present enormous debt was first laid by the Nine Years’ War of 1688 which was ended by the Treaty of Ryswick in 1697.

42 On December 31 1697, Great Britain’s public debts, funded and unfunded, was £21,515,742.

Most of those debts were contracted on short anticipations.

  • Some part was on annuities for lives.

Before December 31, 1701, in less than four years, it was reduced by £5,121,041. This was a greater reduction of public debt than ever before, for so short a time. The remaining debt was only £16,394,701.

43 In the War of the Spanish Succession of 1709, concluded by the Treaty of Utrecht, the public debts further increased.

On December 31, 1714, they amounted to £53,681,076. The subscription into the South Sea fund of the short and long annuities increased the capital of the public debts. On December 31, 1722 it amounted to £55,282,978. The reduction of the debt began in 1723. It went on so slowly that, by December 31, 1739 after 17 years of profound peace, the whole sum paid off was no more than £8,328,354. The capital of the public debt at that time was £46,954,623.

44 The debt increased because of the War of Jenkins’ Ear, which began in 1739, and the War of the Austrian Succession which soon followed it.

On December 31, 1748, the debt was at £78,293,313 after the war was concluded by the Treaty of Aix-la-Chapelle. The most profound peace of 17 years reduced the debt by only £8,328,354. A war of less than nine years added £31,338,689 to the debt.


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