The Wealth of Nations · Chapter
Of Public Debts explained
Smith contrasts the frugality of rude societies, where the rich hoard and spend on hospitality, with commercial states where governments can borrow easily due to the confidence of merchants and manufacturers.
What happens
Smith contrasts the frugality of rude societies, where the rich hoard and spend on hospitality, with commercial states where governments can borrow easily due to the confidence of merchants and manufacturers. He warns that once national debts accumulate to a certain degree, they are rarely paid fairly, often leading to disguised bankruptcy through coin debasement, which defrauds creditors and subverts private fortunes.
Themes in this chapter
Role of Government
Smith examines how governments borrow and manage debt, warning against deceptive practices like coin debasement that harm creditors and the economy.
Wealth and Money
Discusses hoarding in rude societies versus lending in commercial states, and the manipulation of coin denomination to reduce real debt.
Social Class and Inequality
Highlights that public creditors are often wealthy, and debt debasement enriches idle debtors at the expense of frugal creditors.
Characters to notice
- Great Britain
Discussed as a commercial state that supports a large debt and has used coin debasement to disguise bankruptcy.
- The Romans
Cited as an example of debasing coinage after the first Punic war to pay debts with a fraction of what was owed.
- The Tartars
Mentioned as contemporary chiefs who still maintain treasures, illustrating hoarding in non-commercial societies.
Key passages
“When national debts have once been accumulated to a certain degree, there is scarce, I believe, a single instance of their having been fairly and completely paid.”
Once public debts reach a high level, they are almost never fully and honestly repaid.
Smith asserts that such debts typically end in bankruptcy or disguised default.
“The raising of the denomination of the coin has been the most usual expedient by which a real public bankruptcy has been disguised under the appearance of a pretended payment.”
Governments commonly disguise actual bankruptcy by increasing the face value of coins, making it seem as if they are paying when they are not.
Smith criticizes this deceptive practice as harmful to creditors and the broader economy.
“A fair, open, and avowed bankruptcy is always the measure which is both least dishonourable to the debtor, and least hurtful to the creditor.”
An honest and transparent declaration of bankruptcy is the least disgraceful and least damaging option for both the state and its creditors.
Smith argues for straightforward bankruptcy over deceptive monetary tricks.