REPUDIATION AS A SCIENCE.
ing " or short-term obligations. in fact, as far as its cash transactions are concerned, scarcey relieved itself at all. That is wretched mismanagement, inexcusable even if, as we believe to be the case, the receipts of the Turkish Treasury are very much less than the paper accounts show, or the world has been accustomed to believe. We venture to say,-though we believe still better plans might be devised, that if the Porte had simply converted its whole Debt, permanent and floating together, into a Three-per-Cent. ConsolDebt of £250,000,000, it would have stood better in the market than it does now, have possessed a larger revenue available than it now has for war, and have ruined much fewer people than are now condemning it for fraud. It would have enabled itself, after some delay, to recover confidence gradually by steady payments, which now, while the Floating Debt deranges all calculation, it is impracticable to make. As it is, no lender aware of the position of the Floating Debt, knows in the least whether in buying " Turks " he is buying mere paper, or a right to a very large permanent annuity,squal at present prices to 18 per cent, per annum. The theory of the Porte is, that the Government will pay half their promised interest regularly, and if they do," Turks " are worth at least 50, 6 per cent. being about the usual interest required on a second- class security ; but what with promises of improbable future pay- ments, and issues of bonds for interest which only increase the Debt, and ridiculous payments to Sinking Funds, " Turks " are worth 15, and the Floating Debt increases every day. The case is nearly as bad in Spain. The Debt of Spam is nominally almost equal to the Debt of Great Britain, and cannot be paid. Spain, however, can, if its Ministers get rid of the Floating Debt, pay about £7,000,000 a year, to increase with time, order, and more scientific taxation. Instead, how- ever, of offering that amount—that is, repudiating wholly and starting fresh with a new Debt, to be held by the -old creditors—S. Salaverria talks solemn rubbish about "this sacred Debt," which he is about, like Mr. Wititterly, to "leave owing," and makes an announcement of a compromise which sends Spanish Stock down to 14, a price absolutely below the market value of a good security, paying, say, ten shillings per cent. The Peruvian Government—which has this ad- vantage over most other Governments, that it can pawn a visible and tangible article as collateral security, can, as it were, deposit jewels to back its note of hand,—has vacillated, and intrigued, and jobbed till its credit is destroyed and its creditors ruined, without any sufficient relief to its Treasury, which, by all accounts, is more empty than when it was paying interest over the counter.
No good, whatever, that we see, accrues to anybody from this sort of blundering, and least of all to the State, which is the only party to the affair whose interests we need consider to-day, or perhaps at any time. The case must be very ex- ceptional in which the wisest arrangement for the State is not also the wisest for the Bondholders, and we may take it, for the purpose of this argument, that their interests are identical. Supposing, then, that a State, either through internal difficulties snch as civil war, or through the failure of its revenues, or through a continued course of extravagance, has become unable to meet its engagements, but has still some spare revenue left, what course would a sensible Minister adopt We cannot but believe that it would be exactly the contrary course to the one now habitually adopted,—that he would contract the amount of nominal liability, rather than the amount of nominal interest. The effect of that course would be, first, to relieve the Treasury to the same amount as the equivalent reduction of interest ; secondly, to give the bondholder a better chance of safety for his securities ; and thirdly, to strengthen the national spirit, now unduly depressed by an apparently unbearable load. Nations are just like individuals,—they will not strive heartily for the apparently impossible. For example, taking the Debt of Spain to be in round numbers £700,000,000 sterling at 3 per cent., payment is at once perceived to be impossible. "How can Spain," says the average Spaniard, "pay a Debt nearly equal to the Debt of Great Britain ? The interest would consume all her revenue, and as for the principal, no system of drawings or reductions will in a century make the smallest impression on such a mass. It would be better to be bankrupt at once,"—and he listens to a proposal to pay only 1 per cent, with a sense that he is wasting money. Spanish credit is gone, he thinks, and there is that monstrous Debt still loading down Spain, and eating up in advance all the prosperity which order and industry may produce. But suppose that S. Salaverria, instead of offering one coupon for three, offered one bond for three, or better still, one bond at double interest for six, the Spaniard would be much rum hopeful. Suppose, instead of reducing the interest on £700,000,000 to 1 per cent., S. Salaverria had decreed that one-sixth of the Debt should receive 6 per cent., that for every £600 of old bonds he would give a new bond of MO at 6 per cent., he would have offered precisely the same terms ; but Spain would have had a Six-per-cent. Debt -of £115,000,000 only, a manageable amount, an anionnt which every million of surplus could be made to -tell, an amount which drawings at par, should they be again adopted, would perceptibly reduce. Such a Debt would crush the national imagination far less, and would therefore be far more safe, and be seen to be more safe, than the present one, which oppresses financial imagination by its nominal bulk. The possibility of moderate reductions by purchases on Treasury account which would then be evident would of itself keep up prices, and with five years of honest management "Spaniards" might be at 90, or rise to the Chilian level, every year of regular payment increasing confidence till the old default was almost forgotten, as has happened in the case of Portugal. There is no need to think of conversions, that great temptation of Chancellors of the Exchequer, for purchases at market price would be more fair, and the Debt -being manageable as to amount, they would be sufficient to ensure a gradual reduction of the total. Spain, of course, is an extreme case, the nominal Debt being so enormous and the nominal interest offered so low, but even Turkey might, by reducing her Debt one-half, instead of her interest, have kept her credit better in the world.
The second step which a wise Minister compelled to re- pudiate would, we think, take, is to suggest in some way new ground for confidence. A State which repudiates part of its liabilities is always, or almost always, suspected of intending to repudiate the whole, and loses credit out of all proportion to the injury it has inflicted. "Turks," for example, have not been reduced to half their previous value by the sequestration of half their interest, but to one-fourth of it. If this could be prevented even in part, an immense saving would be effected, both by the defaulting State and its creditors ; and we think it possibly might be, and that by a device other than the one which proved successful both in Italy and Austria,—the special taxation of the bonds. The last resources of the State should be scraped together to secure to the bondholders at the time of compromise a certainty that default could not happen again without, at least, a year's notice,—a whole year to remonstrate in, to fight in, or at worst, to provide for the blow. Suppose, for example, S. Salaverria could, when finally arranging with Spanish creditors, pay one year's interest into the hands of a Bondholder's Trust in each country, with authority to pay interest out of that in the event of any default, that would be a perfect guarantee against instantaneous repudiation, against, that is, the nervous shock which so greatly helps to send securities down. Every holder would feel himself more secure, and a great many, viz., that large class which piques itself on its shrewdness and foresight, almost unreasonably secure, under such a precaution. Everybody would have time to provide for loss, and time is one of the many elements in financial security. The cost to the State depositing the money would not be great, for it would receive interest, and in the event of default not being made, would possess a growing and most valuable Sinking-fund, placed out of its own power, an increas- ing Reserve, like the Reserve which gives stability to a pros- perous Bank. Such a scheme is no doubt beyond the power of Turkey, or any of the semi-Oriental States in which financial policy, like political action, is dependent on one ignorant man's caprice, and persistent payment in the teeth of the existence of a Reserve Fund could not be hoped for; but it might be carried out by any Government temporarily ruined, but yet civilised, perma- nent, and moderately honest. Such a fund would be a far better security than the drawings, which to all but very large holders offer inadequate temptation, your chance of a prize being slight, and would not press so heavily as drawings do on the resources of the States concerned. Man rarely looks forward more than a generation, and if a State agrees to pay 6 per cent. for money and 3 per cent, for drawings, it is, as far as pressure on the Treasury is concerned, practically borrowing at 9 per cent. Of course, if a State could deposit two years' interest, instead of one, the effect would be more considerable ; but one would be sufficient to begin with, if the money were fairly placed beyond the depositing State's control.
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