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German credit, were anxious that Germany should not have
to borrow on the same basis as Spain or on worse terms than
Italy. Eventually it was arranged that half the loans should
be in 4 per cent and the other half in 3^ per cent denomina-
tions, both to be irredeemable until the year 191 8. The 4
per cent loans were taken over by the bankers at 102 and
issued to the public at 102.70, while the 3^ per cents were
taken over at 94.80 and issued at 95.60, both loans being
three-fourths of i per cent lower than were the existing 3)^
and 4 per cents on the day when the loan was announced.
The "consortium" of bankers, which issued the loans on this
occasion, was composed of the leading bankers and finance
houses of all the principal cities of Germany. In Berlin the
members of the "consortium" were the Deutsche Bank, Dis-
conto-Gesellschaft, Dresdner Bank, Berliner Handels-Gesell-
schaft, A. Schaaffhausenscher Bankverein, Bank fiir Handel
und Industrie, Nationalbank fiir Deutschland, Commerz und


T h


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d i t of N

a t t n s

Disconto-Bank, Mitteldeutsche Creditbank, Mendelssohn &
Co., S. Bleichroder, Delbriick Leo & Co., and F. W. Krause
& Co.; in Hamburg, the Norddeutsche Bank, Vereinsbank,
L. Behrens & Sons, and M. M. Warburg & Co.; in Frankfort,
M. Lazard Speyer-Ellissen and Jacob S. H. Stern; in Cologne,
the house of Sal. Oppenheim, jr., & Co.; in Munich, the Bava-
rian Hypotheken and Wechselbank and the Bayerische Vereins-
bank; in Nuremburg, the Konigliche Bank; in Mannheim, the
Rheinische Creditbank; in Stuttgart, the Wiirttembergische
Vereinsbank; in Leipzig, the Allgemeine Deutsche Creditanstalt;
and in Posen, the Ostbank fiir Handel und Gewerbe.

The history of Prussian credit since 1886 may easily be traced
by following the average prices of Prussian 2,% per cent consols
from that year to 1908 on the Berlin Bourse. The average price
in 1886 was 102. i. They fell back to 99.8 next year, but rose to
103 in 1888 and 104.4 i" 1889. In 1890 the price fell back to
100.5 3-iid in 1891 to 98.4. For the next two years they stood at
par, and ran up to 102.4 ^^^ 1894, 104.4 i^ 1895, and 104.6 in
1896. This was the high-water mark, though the highest
actual quotation in the year (105.6) was just below the record of
105.8 which had been touched in 1889. The price now sank
steadily to 95.8 in 1900, but recovered to 99.4 in the following
year and to 102.2 in 1903. Then another shrinkage began
which lasted until 1909, when cheap money more than offset the
continuance of heavy borrowing. The following table will show
the close correspondence of the Prussian and imperial 33^ per
cents from 1 904 to 1 908 :


190s -

1 906





loi. 89

loi . 41

99- 59

94- 89

92. 25






93. 21

National Monetary Commission

The slight superiority of Prussia's credit to that of the Empire
may be explained by the fact either that Prussia has more
tangible assets or that the Empire is a comparatively youthful
and artificial creation compared with the Kingdom of Prussia.
Certain it is that some German and foreign investors are inclined
to prefer the security of a German State to the collective guar-
anty of the Empire.

The credit of Saxony, judged by her 3 per cent rentes, at one
time stood higher than that of either the Empire or Prussia.
But in 1898-99 Prussia stood better with the market than
Saxony; for in 1898 Saxony issued a 3 per cent loan at 83, while
Prussia issued 3 per cent stock for a similar amount in the fol-
lowing year at 92. In the same year Bavaria raised a 33^ per
cent loan at 99 and Brunswick got no better than par for a
small 4 per cent issue. Ten years later the situation was very
different, owing to the heavy and persistent deficits of Prussia.
In 1906 a Prussian 3 per cent loan could still be issued at par,
but in 1907 and 1908 large blocks of Prussian 4 per cents had to
be marketed at 99 and 98. Meanwhile in 1907 small issues of
Bavarian and Hessian fours fetched 100 and 102, respectively,
while Brunswick and Hamburg also borrowed on a 4 per cent
basis at par. It is clear that in the last three or four years both
Prussia and the Empire have offended against the law of demand
and supply. They have been issuing stock faster than it can be
absorbed. In 1907 and 1908 Prussia added 600,000,000 marks
to her funded debt and issued 345,000,000 of long-term treasury


T h


r e

d i t of N a t i

n s

The following table gives a conspectus of recent Prussian
borrowings :

Month and year.


of issue in




Mode of issue.

Price of


January, 1902

February, 1904

February, 1905

April, 1906

January, 1908

April, 1908






3 per cent con-



3 ]4 per cent


4 per cent con-
sols with pro-
vision for re-
duction later
to sH and

4 per cent con-


Kleines Konsortium



91. I

98. S

'' 995

"■It was sold to the Konsortium at

^ Sold to Konsortium at 98 4.

The larger States also issue long-term and short-term notes and
treasury bills for more or less temporary purposes. As a rule
the amount of these outstanding is highest in March, but in the
last two or three years the requirements have been unusually
large from November onward, chiefly in consequence of Prussia's
heavy deficits. The increasing pressure of these public bills
on the money market is sufficiently shown by the rapid rise of
rates at which the treasury bills were discounted :



Discount rates.
... 2.3—2.7

4 — 6. o

In the last year of course the difficulties were much accen-
tuated by the American crisis. The amounts of treasury
bills (Schatzanweisungen) which may be issued by Prussia are


National M o n e t ar y C o m m i s s i o n

restricted to 100,000,000 marks, those of Bavaria to 35,000,000
and of Wurttemberg to 20,000,000. The largest amount
actually issued by Prussia, Wurttemberg, Bavaria, and three
smaller States in the period 1902-1907 was 110,000,000 in
December, 1907, and the next largest was 81,000,000 in Feb-
ruary, 1906. In April and August, 1902, only 2,000,000 were


As we have already seen, tlie local indebtedness of Germany
has been advancing very rapidly and was over 7,400,000,000
marks in 1908, nearly double that of the Empire and more than
half that of the States. After 1880, and again still more notably
after 1890, the growth of this debt was much accelerated, mainly
in consequence of the increasing activity of the town councils,
many of which practice what is called municipal socialism.
In the period between 1881 and 1907 the debt of the towns
and "Landgemeinden," with more than 10,000 inhabitants,
increased nearly sevenfold — from 771,000,000 to 5,295,000,000
marks. Of this total, in the former year about 49,000,000 marks
were short-term obligations and in 1907 about 487,000,000. In
the same period the charge for this mass of local debt rose from
53,000 to 285,000 marks. The credit of the towns was rather
better therefore in 1907 than in 1881; for while the debt was
multiplied by 67^ the debt charge for interest, etc., was only
multiplied by 5^^, though this calculation of course assumes that
provisions for sinking fund remained a constant proportion.

If, however, we look at the borrowing of the last ten years
we find a general tendency, especially at the end of the period,
for the rates of borrowing to rise rather than to fall. In 1898,
for example, the 165 largest towns of Germany borrowed
150,000,000 marks at 3X per cent and 24,000,000 marks at 4
per cent, while in 1906 they borrowed 42,000,000 at 3>^ per cent
and 122,000,000 at 4 per cent. In 1907 and 1908 the municipal


The Credit of Nations

rate of borrowing in Germany began to rise above 4 per cent.
Under these circumstances German municipal loans came to
attract foreign attention, especially in Switzerland, Holland,
and Scandinavia, as offering good security with a high
rate of interest. A considerable quantity of the loans emitted
are absorbed by the town and provincial savings banks and
similar institutions which have funds to invest; but out of the
2,143,000,000 marks of debt issued by the 165 largest towns
from 1897 to 1907, 1,653,000,000 were sold to Bank-Konsor-

Generally speaking, the credit of German towns is lower than
that of the States and Empire, but the difference is less than
might be expected from the analogy of other countries. Berlin's
credit is almost on a par with Prussia's, as there is a very free
market and a particularly strong support from the Berlin Savings
Bank (Sparkasse). The small but rapidly growing towns, where
there is much industry but little capital, have to pay most, as
they have no reserve strength and are more at the mercy of the
large financial houses. Even the towns which are also States —
Hamburg, Bremen, and Liibeck — cannot as a rule borrow
quite so cheaply as Berlin.


The Debt and Credit of France



I. History of Debt.


Though the public debt of modern France dates from the
revolution, the art of borrowing had long been practiced by
the monarchy. The first French King to raise loans on secu-
rity was Francis I. He borrowed from the city of Paris, and
in return alienated to it certain aids and customs, which be-
came known as "rentes sur I'Hotel de Ville." This conven-
ient device, once discovered, was vigorously employed. In
1 56 1 the debt already amounted to 74,000,000 francs and had
become so onerous that the regent, Catherine de Medicis, on the
advice of the Parlement of Pontoise, thought of laying hands on
ecclesiastical property as a means of reducing royal obligations.
The clergy preferred to avert confiscation by a temporary
sacrifice, and after the "Conference of Poissy" they signed an
undertaking to provide for six years an annuity of 1,600,000
livres,'^ whereby the King might regain all the domains, aids,
and customs which had been alienated to the city of Paris.
The annuity, however, was used not to liquidate the old, but
to contract new debt. It became known as "rentes sur le
clerge," which were also sold to the Hotel de Ville. On the
strength of this subvention the clergy afterwards claimed and
obtained many exemptions from taxation. After the civil
wars Henry the Fourth found the finances in great disorder,
with a debt amounting to 337,000,000 livres. But in 1604 his
great Minister Sully effected such extensive reforms and re-
ductions that at the close of the reign, while the revenues had
largely increased, the debt had been diminished by 100,000,000.
Neither Richelieu nor Mazarin were able to maintain the Sully

« Eighty-one livres Tournois = 80 francs.
82300° — 10 6 77

National Monetary Commission

tradition, though the latter made some attempts at debt re-
duction. But by this time borrowing had become habitual
and loans were constantly issued in the early part of Louis
the Fourteenth's reign, whose finance ministers had a hard
task to supply their master's prodigal magnificence. One of
them, Fouquet, who raised loans of all kinds at all possible
rates of interest, made a first (and unsuccessful) attempt to
employ the tontine annuity, so popular both in France and
England in the next century, as a means of money raising. It
was suggested to him by its Italian inventor, or name father,
Laurent Tonti; but with Colbert at the treasury a very dif-
ferent system came into force. Acting on his belief that rentes
were a most useless and expensive possession for a State, he
took active measures to reduce debt. He had no belief in the
benefits of credit; in his eyes loans were always made by idle
capitalists for unproductive purposes, and he looked upon the
interest charge as an improper burden on the taxes. Accord-
ingly, in 1664-65, Colbert redeemed all the debt created in
the previous six years and compulsorily reduced the interest
on the remainder. This drastic measure had its disadvan-
tages, for it so estranged the capitalists that when shortly
afterwards loans had to be raised for the wars it was found
very difficult to get the money. Warned by this experience
Colbert suggested, after the peace of Nymeguen, 1679, an op-
tional conversion "au dernier 20 "(i. e., 5 per cent) of loans
contracted "au dernier 14-16" (i. e., 7 per cent to 6% per cent)
and so reduced the annual charge by more than 2,000,000
livres. At his death, in 1683, the debt charge — which in 1663
had exceeded 30,000,000 livres — stood at about 8,000,000;
this figure he considered to be not out of proportion to the
scale of public expenditure.

With the death of Colbert all sound management vanished
from French finance, and in 1715 (at the end of the reign ol


The Credit of Nations

Louis XIV) the capital amounted to nearly 2,000,000,000
livres, although two years previously Desmarestz had carried
out a compulsory conversion, reducing the interest on all the
debts "au dernier 25" (4 per cent) and the capital to corre-
spond. This lowered the capital value by 135,000,000 livres
and the interest charge by 14,000,000. In the early part of
lyouis the Fifteenth's reign the public finances fell into such
chaos that St. Simon, in the Regent's Council, advocated open
bankruptcy. In 171 9 the notorious John Law, to crown his
bubble projects, proposed a general redemption of the debt —
the rentes to be exchanged for bonds on his India Company.
The crash came too soon and the Freres Paris, who undertook
the liquidation of the gigantic bankruptcy, dealt drastically
with the debt, reducing the rentes to 2 per cent and the life
annuities to 4 per cent. As a result the debt, in 171 9, is said
to have stood at 1,700,000,000 livres capital value, with an
annual charge of 48,000,000 livres. Throughout this reign
the policy of loans and forced reductions continued, and the
mischief caused by the Seven Years' war was aggravated by
court extravagance.

In 1764 the revenue stood at 286,000,000 livres. The whole
public debt of France was estimated (in a memoir presented in
the same year by the parliament of Bordeaux to the King) at
2,400,000,000 livres, one-eighth of which was represented by
annuities for lives. The interest on the whole debt was put at
120,000,000, of which one-fourth was required for the payment
of the annuities.'^ In 1768, in spite of remonstrances from
Parliament, all pretense of debt redemption was suspended,
and from 1769 to 1774 the Abb^ Terray carried out a series of
bankruptcies and forced loans to which he gave the smooth
names of "reductions" and "consolidations" of debt. Never-
theless, when Louis XVI succeeded in 1774, the total debt

oSee Adam Smith's Wealth of Nations, Book V, Chap. III.

National Monetary Co m m is s i o n

charge was very nearly 120,000,000 livres, while the floating
debt amounted to 235,000,000 livres.

The appointment of Turgot revived the credit of the State.
The rate of interest on loans to the Government dropped in
twelve months from 5-/5 to 4 per cent, and when the great min-
ister fell he was planning a large conversion. His programme —
"ni banqueroute avouee ou masquee par des reductions forcees,
ni augmentation d'impots, ni emprunts" — was a complete re-
versal of all French financial policy since Colbert, and might have
saved the monarchy. In his two years he paid off 74,000,000
livres of debt and 58,000,000 of anticipated revenue, leaving
only 10,000,000 of the latter to be dealt with by his successor.
But Necker (i 777-1 781) reverted to the bad old plan of bor-
rowing; and between 1783 and 1787 Calonne, the last finance
minister of the ancient regime, added 650,000,000 to the debt.
He was at last (February, 1787) forced to summon the assembly
of notables, and in his opening speech admitted that the last
ten years had added 1,250,000,000 to the debt, and that the
deficit for the present year was 115,000,000. It is not sur-
prising that he lost his office. In 1789 a committee of the
constituent assembly reported that the annual debt charge,
exclusive of the floating debt, was then 208,000,000 livres.

From the above history, drawn from the best sources avail-
able — though the figures have no pretense to exactitude, so
confused were the public accounts and so conflicting the esti-
mates even of the best informed — we may infer that borrowing
was a main cause of the downfall of the French Monarchy, and,
further, that financial ruin was due at least as much to the
methods followed as to the amount raised. An open bank-
ruptcy or confiscation is, of course, a public fraud upon private
lenders, and makes it impossible for the state to raise further
sums except at exorbitant rates of interest. Even more dis-
astrous to the national trade, revenues, and credit was the


The Credit of Nations

favored plan of "redeeming" debt by issuing paper money to
the creditors, the result being a general debasement of the
currency or destruction of public faith in the means of exchange
and a general refusal to accept money in ordinary commercial
transactions. Consequently the state, receiving taxes in its
own depreciated and debased currency, was unable to pay its
way, the prices of things and services having increased auto-
matically as the currency was enlarged and debased.


In spite of several declarations by the assembly that they
held the national debt as a sacred trust, the public credit of
France had sunk to a very low ebb. Necker, now again Finance
Minister, tried to raise two loans of 30,000,000 and 80,000,000
francs, respectively, but neither were covered. The report of
the committee had recommended an issue of assignats; this
vile measure was voted in spite of Necker's protests, and he
resigned in August, 1790. The issues of assignats continued,
and in 1 793 a forced loan of i ,000,000,000 francs only produced
100,000,000. The "loan" (which did not bear interest) was
practically a confiscaiion of all income in excess of 9,000 francs
per annum and a heavy tax up to that limit. The Government,
it may be added, estimated the income without consulting its
possessor. Yet this same year saw the first appearance of the
public debt in its modern form. By the law of August 24,
^793. Cambon proposed the creation of a "Grand livre de la dette
publique" in which all the existing debt forms were to be entered
as a unified 5 per cent debt. The annuities were afterwards
added. The book entries were treated as conclusive evidence
of the claim. After this reorganization the capital value of the
debt in 1793 was nearly 3,500,000,000 francs, and the interest
charge 174,000,000 francs, of which only one-quarter was paid
in money and the remainder in assignats. In 1797, however,


National Monetary C o m m i s s i o n

depreciation of the assignats and general financial confusion
induced the Government to "pay off" two-thirds of the debt in
bonds exchangeable for land; in other words, the debt was
reduced to one-third of its original value, and after some further
confiscations amounted at the end of the eighteenth century to
800,000,000 francs with an annual charge of 40,000,000 francs.
Under Napoleon's rule and that of his two excellent finance
ministers. Gaud in and MolUen, the issues of inconvertible paper
ceased, and loans were as far as possible avoided. As a result
the Restoration in 1 8 1 4 found the debt charge, after fourteen
years of unprecedentedly costly war, augmented by only
23,000,000, i. e., from 40,000,000 to 63,000,000 francs. Of this
additional 23,000,000, 6,000,000 were the debts of the countries
taken over by France and 10,000,000 were obligations incurred
by the Directory. Only 7,000,000 (or a capital increase of
140,000,000) were attributable to the Empire. Napoleon's
policy of making war "pay its way " imposed very heavy annual
burdens on France and the conquered territories. Nevertheless,
in consequence of this policy, the financial situation of the
French Government at the end of the Napoleonic wars was
enviable compared with that of the victorious Government of
Great Britain.


The restoration government had to meet the war indemnity
imposed by the allies, to compensate the emigrants, and to take
up the large unpaid balances of the imperial expenditure. For
all this large loans were required. Although urged by some of
its supporters to repudiate the existing debt, it had the honesty
and sagacity to take longer views. Even so, such was the scar-
city of capital and the suspicion of the few who had money to
invest, that for some time the French Government was unable
to borrow at par even on a 5 per cent basis. From 181 5 to 181 8


The Credit of Nations

5 per cent loans were actually issued at prices varying from 52.50
to 67.60 — that is, practically at from 9>< per cent to y% per cent.
It would have been wiser, as M. Leroy Beaulieu observes, to
create 6 or 7 per cent stock at a price nearer par. The actual
burden would have been much the same, and it would have
eased the work of redemption later. Yet stock of even lower
denominations was issued, notably the emigrants' indemnity
of 25,000,000 francs at 3 per cent.

In 1 81 9 a law was passed creating auxiliary "grands livres"
in every department, and so giving facilities to the provincials
for investment in government stock. From this point public
credit steadily rose; in 1821 a 5 per cent loan was issued at 85.55,
and another in 1823 at 89.55. -^ steady policy of debt redemp-
tion and budget surpluses had such an effect that the last loan
contracted by the Bourbon government (80,000,000 of 4 per
cent rentes in 1830) was issued at 102^ — the only French loan,
it is said, that was ever emitted above par. The debt existing
in 1 814 had been practically redeemed, but the additions since
that date involved an annual charge of 164,500,000 francs, a
good deal more than double the legacy of Napoleon, but a mere
fraction of the British war debt.

During the July revolution the 3 per cent funds fell to 46, and
when in 1831 the Orleanist government emitted a loan of
120,000,000 at 5 per cent they could only obtain a price of 84,
which made the real charge 6 per cent. A "patriotic" loan of
100,000,000 5 per cents at par in the same month proved an
utter failure, for only one-fifth was subscribed. Several loans
followed for public works, military preparations, and to meet
the persistent budget deficits. They were issued, not in 5 per
cents, which had risen well above par, or even in fours, but in
threes, which for many years after were not near enough par to
make an advantageous form of loan. The prices ranged from
75.25 to 84.75.


National Monetary Commission

The strength of the funds under Louis Philippe is a curious
phenomenon, and marks the extreme of French credit as com-
pared with the early years of the Bourbons. Professor Bastable
observes : "

"The position of the stocks over 3 per cent would have easily
admitted of conversion without any increase of capital into a 4
per cent or even 2,% per cent stock, but to avoid popular hostility
this evidently ])rudent course was not taken." He gives a table
showing the position of the various stocks in 1 845 :


S per cent. .
^Vi per cent
4 per cent . .
3 per cent. .

122. 8s

116. 25

no. s



u6. 45

In spite of eighteen years of peace and a considerable amount
of debt redemption, 13,000,000 had been added to the debt
charge, leaving it at 177,000,000 francs, or a total capital debt
of 3,540,000,000 francs.

The three years of the Second Republic passed amid grave
financial disorder. As a result of the February revolution the
3 per cents collapsed to 32.50, and when the new government
tried a "patriotic" loan of 100,000,000 5 per cents at par only
26,000,000 were taken up. During the three years the 5 per
cents fluctuated between 50 and 75. The difiiculties of the gov-
ernment induced them to resort to such questionable measures
as forced "conversions." In July, 1848, some treasury bonds
which fell due were not paid off, but were arbitrarily changed to
3 per cent rentes at 55. This stock was quoted on the Bourse

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Online LibraryFrancis Wrigley HirstThe credit of nations → online text (page 6 of 16)