In order to set the effect of loans on national wealth in a still clearer point of view, let us suppose that a country, with two millions of people and four hundred millions of capital, is engaged in war, and that the government borrows and spends fifty millions of the national capital. If the ordinary rate of profit were ten per cent., the annual income of this state previously to the war would be forty millions; but at its close, and after the fifty millions had been borrowed and spent, it would only be thirty-five millions. It is plain, however, that this reduced income would, in future, have to furnish the means of subsistence to the whole two millions of inhabitants; and although it is true that the country is not deprived of the interest of the debt, for that is merely tranferred from one class to another, it is no less true that it is deprived of the income derived from fifty millions of capital; and that the productive power which had formerly fed and clothed an eighth part of the whole inhabitants being for ever lost to the state, they have now to depend for subsistence entirely on the exertions of those who, it is probable, could previously with difficulty maintain themselves.

The doctrine we have been endeavouring to elucidate, has been very clearly and ably stated by Mr Justice Blackstone.By means of our national debt,' says he, the quantity of property in the kingdom is greatly increased in idea, compared " with former times; yet, if we coolly consider it, not at all increased in reality. We may boast of large fortunes, and quantities of money in the funds; but where does this money exist? It exists only in name, in paper, in public faith, in parliamentary security; and that is undoubtedly sufficient for the creditors of the public to rely on. But then, what is the pledge which the public faith has pawned for the security of these debts? The land, the trade, and the personal industry of the subject, from which the money must arise that supplies the several taxes. In these, therefore, and in these only, does the property of the public creditors really and intrinsically exist; and of course, the land, the trade, and the personal industry of individuals, are diminished in their true value just so much as they are pledged to answer. If A's income amounts to 100l. a year, and he is so far indebted to B that he pays him 50l. a year of interest, one • half of the value of A's property is transferred to B, the credi

capital,' says he, qui a passé des mains des créanciers de l'état dans celles du gouvernement, d'ou il sort pour payer les frais d'une guerre, est irrevocablement perdu.' (Essai sur l'Etat actuel des Finances de la Grande Bretagne. p. 119.)

'tor. The creditor's property exists in the demand which he has upon his debtor, and nowhere else; and the debtor is only a trustee to his creditor for one half of the value of his income. In short, the property of a creditor of the public consists in a certain portion of the national taxes; by how much, therefore, he is the richer, by so much the nation which pays those taxes is the poorer.'-(Commentaries, Vol. I. p. 327.)

These few observations will serve to show the general nature of the funding system; but they are not enough to deter mine its merits, as compared with the plan for raising the supplies within the year. Every war must necessarily occasion the waste of capital and of wealth; still, however, it is of the greatest importance to know how these unavoidable consequences may be rendered least injurious, and most speedily repaired; and such is the object of the inquiry on which we are now to enter.

If the facility with which money may be obtained, were the only circumstance to be attended to in comparing the borrowing system with the plan for raising the supplies within the year by a corresponding increase of taxation, there can be no question that the preference would have to be given to the former. The high rate of interest stipulated by Government, the regularity with which it is paid, the facility with which that interest may be disposed off, and the hope, which every one's confidence in his own good fortune makes him entertain, of profiting by the fluctuations in the price of the funds, all conspire to induce a large class of capitalists to accommodate Governments with loans in preference to individuals, and enable them to obtain the largest supplies on the shortest notice, and with very little difficulty. The public, on their part, are equally well pleased with this system. Instead of being called upon to advance a large sum in taxes, they are only taxed to pay the interest of that sum. A burden of this limited extent, as it lays no individual under the necessity of making any considerable reduction in his expenditure, is generally submitted to without a murmur. Such a mode of providing for the expenses of a war, seems to divest it of half its privations and hardships; and we cease to feel surprised that Governments should have so universally resorted to a sytem which, while it furnishes them with the largest supplies, is so very popular with their subjects.

But the merits of the funding system are not to be determined merely by the facility which it affords for raising supplies. This is a consideration which certainly ought not to be overlooked; but there are others of infinitely greater import

ance. The real effects of any financial operation can never be ascertained, by looking only to those of which it is immediately productive. We must extend our observations to those which are more remote, and endeavour, if possible, to trace its permanent and ultimate influence. Now, if we do this-if we attend, not to the transitory only, but also to the lasting effects of the funding system on the wealth and industry of every country in which it is adopted, we shall find, that the facility which it gives of raising the supplies, so far from being an advantage, is really one of its greatest defects. It is worse than idle to suppose that any scheme for defraying war expenditure can ever be proposed, capable of protecting individuals from the losses and privations which are inseparable from national struggles and contests. However just and necessary, a war is always in itself an evil of the first magnitude; and every nation which has the misfortune to be involved in it, must sooner or later experience the pernicious effects of the destruction of capital, and of the waste of the means of future production, which it never fails to occasion. Now, it is clear that no scheme of finance can be bottomed on sound principles, whose effect is to disguise these necessary consequences of war, and to deceive the public with respect to their real situation. This, however, is notoriously the case with the funding system. It is said, by its apologists, to require no individual to make any extraordinary sacrifice at any particular period; and in this respect it bears a close resemblance to those most dangerous diseases which steal slowly and imperceptibly on the human constitution, and do not discover their malignant symptoms until they have fastened on the vitals, and vitiated the whole animal economy. There are no means whatever by which the profusion and waste occasioned by a war can be balanced, except by the greater industry and economy of individuals: And to cause this industry and economy to be practised, they ought to be made fully sensible of the influence of war expenditure on their own private fortunes. The radical defect of the borrowing system, consists in its deceiving them on this point, and in its making no sudden encroachments on their comforts. Its approaches are gradual, and almost unperceived. It requires only small immediate sacrifices; but it never relinquishes what it has once gained; while the necessity for fresh sacrifices, arising as well from their own, as from the ambition, rapacity, injustice, and folly of their neighbours, must continue as great as ever. Such a system is essentially delusive and treacherous. It strips the public of one enjoyment after another; and before

they are awakened from their trance, and made acquainted with their actual condition, their property and industry are probably encumbered with a much larger permanent payment, on account of the interest of the public debt, than what, had they submitted to it at once, might have been required to defray the whole expenses of the war.

It may perhaps be said, that supposing we are engaged in a war which costs twenty millions a year, it is really the same thing, provided the rate of interest be 5 per cent., whether we pay the twenty millions at once by a proportional increase of taxation, or borrow them, and pay the lenders an interminable annuity of one million a year; for, when interest is at 5 per cent., twenty millions in one payment, and an interminable annuity of one million, are of precisely the same value. But it is just because they never have been, and never will be, so considered by the public, that the funding system is injurious. Suppose, for example, that the supplies are raised within the year, and that the share falling to a particular individual is 1000l. The wish to maintain himself in his former station, and to preserve his fortune unimpaired-' a wish which comes with us from the womb, and never leaves us till we go into the grave' *-would most certainly stimulate him, on being called upon for this sum, to endeavour to discharge it, partly by an increase of exertion, and partly by a saving from expenditure, without suffering it to continue an encumbrance on his property. But, by the system of loans, he is called upon to pay only the interest of this 1000l., or 50l. a year; and instead of endeavouring to save the whole 1000l., he is satisfied if he saves the interest. The whole nation, acting in the same way, save only the interest of the loan, or one million, and allow the principal sum of twenty millions, which they would have either wholly or partly saved had they been called upon to pay it immediately, to remain as a mortgage on their property, or the produce of their industry. Men act thus, because they invariably reckon a war burdensome, only in proportion to what they are at the moment called upon to pay for it in taxes, without reflecting on the probable duration of these taxes. It would be an exceedingly hopeless undertaking to attempt to convince any one that a perpetual payment of 50l. a year is as burdensome as a single payment of 1000l. We are apt to entertain an idea that some future accident or revolution may occur to relieve our properties from the burden of the perpetual payment; and, at all events,

* Wealth of Nations, I I. p. 19

we consider it as certain, that the greater portion of it will have to be defrayed by posterity. Indeed, this very circumstance of its throwing a portion of the expense of every contest on posterity, or, which is in effect the same thing, its distributing its expense equally over a lengthened period, is one of the arguments principally relied on by the advocates of the funding system. But it is easy to see that this argument is wholly and completely fallacious;-and that the more the interests of posterity can be protected, without injuring those of the existing generation, so much the better. Now, this is what the plan for raising the supplies within the year would really do. Supposing, however, that it did not generate an additional spirit of economy, still its adoption could do no possible harm to the present generation, but would have the very same effect with respect to them and posterity as the system of loans: For, it must obviously be a matter of perfect indifference to the heir of an individual whose share of the expenses of a war amounts to 1000l., whether he pays it at once, and leaves him 10007. less, or does not pay it, and leaves him 1000l. more, subject to a constant charge of 50l. a year. But it is the peculiar advantage of this plan, that while it entails no greater burden on any individual than the system of borrowing, and while it gives full liberty to every one who is so disposed, to remove a part of that burden from his own shoulders on to those of his successors, it has a powerful tendency to render the public less inclined to avail themselves of this power, and more disposed to make immediate sacrifices, and to become more industrious, frugal, and parsimonious, than they would otherwise have been. It is a gross error to suppose that it protects the interests of posterity, by laying any heavier burden on the existing generation; it does no such thing; it protects them only because it gives additional force to the accumulating principle, and because it stimulates every individual to maintain himself in his station, and to preserve his capital undiminished.

Here, then, is the distinguishing criterion of the two systems. The funding system occasions only such a small additional degree of exertion and economy as may be required to produce and save the interest of the capital that has been spent in warlike operations; but the system of raising the supplies

* This distinction was first clearly pointed out by Mr Ricardo, in his Principles of Political Economy and Taxation, 1st Ed. p. 337; and in his article Funding System,' in the Supplement to the Encyclopædia Britannica.