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the East India Company and the Bank of England in return
for the renewal of their charters in 1708 and 1709. Large
amounts were also raised by annuities, and toward the end
of the reign, when, owing to the cost of the war, money was be-
coming very difficult to raise, recourse was had to a vicious
method which added to the capital of the public debt a much
larger sum than the exchequer received. By means of six
lotteries, including one granted after the peace of Utrecht,
£9,000,000 of money were obtained. Each ticket was entitled



'5



National Monetary Commission

to a capital equivalent to the sum advanced bearing inter-
est at 6 per cent with repayment in thirty-two years. But
in addition the prize drawers were entitled to large additional
sums amounting in all to £2,723,000 repayable in the same
year and bearing the same interest. So that the Government
borrowed £9,000,000 but created £11,723,000 of debt. The
history of the relations of the Government and the South Sea
Company, ending in the South Sea Bubble, would require a
separate chapter. Suffice it that large sums were also borrowed
through this channel.

The reign of George I marked an important recovery of
national credit, thanks to the operation of peace and economy.
Although the nominal capital of the debt was but slightly
diminished, the charge for interest, and consequently the real
burden on taxpayers, was very greatly decreased. Several
important improvements in the management of the debt were
introduced. In the first place the plan of mortgaging branches
of the revenue was replaced in 171 5 by a loan raised in per-
petual annuities redeemable by Parliament on repayment of
principal, but with funds assigned only for payment of inter-
est. This system was thenceforth generally adopted, though
the old plan of specific mortgage was also occasionally resorted
to. Under the old system separate accounts of each loan with
the assigned taxes had been kept. This had led to confusion,
as there emerged a multiplicity of funds, some showing defi-
ciencies and others surpluses. Accordingly, soon after the peace
of Utrecht, most branches of the revenue were united in three
funds — the aggregate fund, the general fund, and the South
Sea fund — each fund being charged with the payment of cer-
tain annuities. The united surplus of these three funds formed
the basis of the first sinking fund (171 6), usually called after
Sir Robert Walpole, though its real author was Lord Stan-
hope. In 1 71 7, after negotiation with the Bank of England



16



The Credit of Nations

and the South Sea Company, a general reduction of interest
on the pubHc debt was agreed upon to 5 per cent — the debt
in King William's reign having been contracted mainly at 8
per cent and that of Queen Anne's reign mainly at 6 per cent.
Almost all the public creditors agreed to the reduction, and
very few had to be paid off. Ten years later, in 1727, the
Government arranged to reduce from 5 to 4 per cent the inter-
est on its debt to the Bank and the South Sea Company, and
in 1732 a similar arrangement was made with the East India
Company. The irredeemable annuities were also converted
into redeemable debt, and a reduction of interest to 4 per
cent upon this new capital was agreed upon in 1727. At the
end of George the First's reign the total debt funded and un-
funded was estimated at about £52,000,000 sterling and the
charge for interest at £1,217,551.

During the first part of the reign of George II (1727-1760),
under the wise administration of Walpole, peace and financial
progress continued. Although the fallacious principle of con-
tracting new debts while applying a sinking fund to the reduc-
tion of old debts was still occasionally observed, the debt was
substantially diminished. In 1739, however, a long war began,
at first with Spain and afterwards with France and Spain to-
gether, which eventually added some £30,000,000 to the na-
tional debt. With the growing wealth of the nation, however,
and the growing confidence in public credit, the Government
easily raised the large amounts required at from 3 to 4 per cent,
though the rate went a little higher in 1 745 owing to the alarm
caused by the invasion of the Young Pretender. During the
peace which followed an important conversion of the debt was
effected. It was enacted in 1749 that all the public creditors
at 4 per cent who should signify their readiness to accept 3
per cent after December 25, 1757, should have their existing
rate of interest continued till December 25, 1750, and should



17



National Monetary Commission

then receive 3>^ per cent till December, 1757, after which the
interest should be 3 per cent. The total amount of the debts
involved in this important scheme, which was to serve as a
model for future financiers, was £57,000,000 sterling. Most
of the creditors accepted the offer; but as some declined it
was repeated in 1753, though on less favorable conditions, as
the offer of 3^2 per cent interest was only till December 25,
1755. Most of the remaining creditors then accepted, and those
who persisted in declining were paid off. The debts thus dealt
with were united in a fund afterwards called "the 3 per cent
reduced annuities," while the debts originally contracted at
3 per cent were united in another fund called "the 3 per cent
consolidated annuities," Thus practically the whole debt was
converted in the middle of the eighteenth century into the
"sweet simplicity of 3 per cent," and the two parts of it were
known into our own time as "reduced threes" and "consols."
British credit in fact stood about as high then as it does now —
a rather startling fact.

Although during the peace this great reduction in the debt
charge was effected, the nominal amount of the funded debt was
but little reduced. The unfunded debt, however, which had
become larger, was nearly all paid off in 1756 before the Seven
Years' w^ar broke out. Nearly £60,000,000 were added to the
debt by the Seven Years' war, which was far more costly than
its predecessors, and 3 percents fell far below par. Various
devices were resorted to, such as (in 1756) a 33^ per cent loan
redeemable in fifteen years; lottery loans; ^ percents (1760),
reducible to 3 per cent after twenty-one years, allowing £103
for every £100 borrowed; and a 4 per cent loan for £12,000,000
(1762), to be reduced to 3 per cent after nineteen years, with an
annuity of £1 for ninety-eight years. A large floating debt in
navy bills, exchequer bills, etc., incurred during this war was
paid off during the peace which ensued. The following con-



18



T h



C 7^ e d i t of Nations



spectus shows the progress of the national debt from 1689 to
the war of the American Revolution :



Debt at the revolution, 1689

Debt contracted during the succeeding wars of King

William

Debt at peace of Ryswick, 1697

Debt paid off during peace

Debt in 1702, at commencement of Queen Anne's war

Debt contracted during the war

Debt at peace of Utrecht, 1713

Debt paid during the peace

Debt in 1739, at beginning of war

Debt added during the war

Debt at peace of Aix la Chapelle, in 1748

Debt paid off during peace

Debt in 1756, at beginning of Seven Years' war

Debt added by Seven Years' war

Debt in 1763, at peace of Paris

Debt paid off during peace

Debt in 1775, at commencement of American war



Principal.



Interest and
annuities.



j£664, 000



20,851,
21.515.

5. 121.
16, 394,
35.75°.
52. 145.

4. 190.
47.954.
31.339.
79. 293.

4.961,

74.332,

64.533.

138,86s,

10, 281,

128,583,



000
000
000
000
000
000
000
000
000
000
000
000
000
000
000
000



;e39,ooo

I, 681, 000

I, 721 , 000

410, 000

I, 310, 000

2, 040, 000
3,351,000

1, 338, 000
2,012, 000
I , 078, 000

3, 091 , 000
480, 000

2, 610, 000
2, 241 , 000
4, 852, 000

380, 000
4, 471, 000



By this time it was clear'that the national debt was advanc-
ing at a dangerously rapid rate; and the whole of it had been
spent upon war. But from a financial point of view the war
with the American colonies proved more disastrous than any
of its predecessors. The first loan of 1776 was £2,000,000 in
3 percents at £107 los. funded for every £100 borrowed. In
1777 £5,000,000 were raised in 4 percents at par with an annuity
of I OS. for ten years. In the two following years the Govern-
ment reverted to 3 per cent issues with large annuities to tempt
the public. In 1780 £12,000,000 were borrowed in 4 percents
at par with an annuity of £1 i6s. 3d. for eighty years. In 1781
3 percents were funded at £150 with £25 added in the 4 percents,
so that by this transaction £21,000,000 was added to the
capital of the debt, though only £12,000,000 reached the ex-
chequer. In short, the credit of the country went from bad to



19



National Monetary Com m i s s io n

worse. The course of the funds has been described in telling
language by »Sir George Trevelyan :

"The funds always fell after British defeats and never very
visibly recovered themselves in consequence of a British vic-
tory. In August, 1774, before the revolution began, the 3 per
cent consols stood at 89. A month before the news of Long
Island arrived in London they were at 84; a fortnight after
that news they were at 82. * * =!= By October, 1777, consols
had fallen to 78. The tidings of the capture of Burgoyne
brought them down to 70. They fell and fell until the capitu-
lation of Lord Cornwallis reduced them to 54; and they could
hardly have gone lower if they were to retain any value at all."

The last sentence is perhaps an exaggeration; and in fact
twenty years later, at an early stage in the war of the French
revolution, our 3 per cent consols actually fell to 47.

We may now continue our history, following the figures of
Robert Hamilton, the learned and accurate author of the
"Inquiry concerning the National Debt." ^



Principal.



Interest and
annuities.



Debt in 1775, at commencement of American war

Debt added by American war

Debt in 1783, at peace of Versailles

Debt paid off during the peace

Debt in 1793, at commencement of French war

Debt in 1802, at peace of Amiens

Debt in 1814, after Napoleon's retirement to Elba



£128,583,000
121, 267, 000
249. 851, 000
5,732,000
244, 1 18, 000
520, 207, 000
742, 615, 000



£4, 471.000

4, 980, 000

9,451.000

149, 000

9, 302, 000

18, 643, 000

26, 647, 000



These figures, however, only relate to the funded debt. There
was also an enormous amount of floating or unfunded debt.
Thus according to Porter in the Progress of the Nation^ the

a Third edition, 1818. This treatise has never been superseded; its
conclusions have only been confirmed and illustrated by experience. It
will be observed that while the American war did not quite double the
debt it more than doubled the debt charge.

& Edition of 1847, p. 482.



The Credit of Nations

whole capital of the debt funded and unfunded amounted to
£637,000,000 in 1802 and had risen to £885,000,000'^ in 1816,
involving a charge for interest in that year of £32,938,000 —
more than half of the whole public revenue from taxes. The
national credit was, of course, much impaired. During the
French wars the price of 3 per cent consols fluctuated between a
maximum of y^) and a minimum of 47.

The miserable condition of the country after the war is well
known, and the financial recovery was very slow. Until 1822
little was done. In fact Joseph Hume declared in that year that
the debt had been increasing rather than diminishing since 181 6.
But in 1822 Vansittart introduced a scheme which led to the
conversion of the 5 percents with a large saving of interest, and
also provided for the establishment of a real sinking fund.
Some substantial retrenchments were effected in expenditure,
and in the following year Robinson, Vansittart's successor at
the exchequer, found himself with a surplus of £5,000,000,
which he applied to the reduction of the national debt. A num-
ber of taxes were repealed or reduced, and a net surplus of
£3,000,000 was recommended as a sinking fund for the re-
duction of debt in the future. Thus at last the elaborate
machinery of a sinking fund, first suggested by Price to Pitt,
which had proved worse than futile, was definitely abandoned.
From this time until 1833 there were annual reductions of the
national debt, which fell in ten years from £885,000,000 to
£841,000,000. The result was immediately visible. In 1824,
when over £6,000,000 of debt was canceled, 3 per cent consols
rose to 96, the highest point touched since 1792. After 1833
the reduction of debt was suspended, but in 1837-38 there were
small reductions and consols rose in the latter year to 95. Then
came the Whig deficits, and consols drooped until Peel took

o Professor Bastable estimates the unfunded debt after Waterloo at
£60,000,000, and the funded at £826,000,000.



21



National Monetary Com m i s s ion

the helm. In 1841 this great financier found that the whole
debt, i. e. "the aggregate gross liabilities of the State,"*'
stood at £838,000,000 and that consols were below 90.
By 1845, in spite of sweeping reductions of taxation, he had got
3 per cent consols to par, and there they stood in 1852-53, the
debt having been reduced by March 31, 1854, to £803,000,000.

By the Crimean war £33,000,000 were added to the debt,
which had risen to £836,000,000 in 1857, and a marked depre-
ciation occurred in consols and in many other gilt-edged secu-
rities.''

In the next twenty years nearly £70,000,000 of debt were ex-
tinguished — it was £768,000,000 in 1877 — and consols varied
from 84 to 97. In the following twenty years the reduction
amounted to no less than £123,000,000. After 1880 3 percents
were ordinarily above par. In 1884 a small quantity oi 2% and
2|^ percents were created by Mr. Childers, and in 1888 Mr.
Goschen converted £549,000,000 vv^orth of consols into 2^ per-
cents. From £736,000,000 in 1887 the debt was reduced to
£635,000,000 in 1899. This was our best performance in debt
reduction during the nineteenth century, and it is not surprising
that during a glut of cheap money it should have led to a
record rise in consols. In three consecutive years, 1896, 1897,
and 1898, the 2^ percents (with a prospect of reduction to 2^4 in
1902), touched 113. The 2% percents, of which there was a
small quantity, touched no.

oThe Return " National Debt" issued year by year gives " the aggregate
gross liabilities of the State" at the end of each financial year from 1836,
defining them as the sum of (i) the nominal funded debt, (2) the estimated
capital liability in respect of terminable annuities, (3) the unfunded debt,
and (4) other capital liabilities.

b "The funds have recently gone down to 10 per cent. I do not say that
the fall is all on account of this danger of war, but a great proportion of it
undoubtedly is. A fall of 10 per cent in the funds is nearly £80,000,000
sterling of value, and railway stock having gone down 20 per cent makes a
difference of £60,000,000 in the value of the railway property of this coun-
try." — John Bright, at Edinburgh, October 13, 1853.



The Credit of Nations

In the budget of 1899 (April 13), in order to provide for the
growing costs of armaments — there had been an increase in four
years of £2,500,000 on the army estimates and of £7,000,000 on
the navy estimates — Sir Michael Hicks Beach, who was then
chancellor of the exchequer, raised certain taxes and took
£2,000,000 off the sinking fund. But the £2,000,000 lopped
off the sinking fund did not represent the whole or net shrink-
age in the reduction of the national debt in that year of abound-
ing prosperity and of abounding revenue. Since 1889 (the date
of the Imperial Defence Act) a new source of danger to credit
had been introduced. While with one hand the chancellor of
the exchequer was extinguishing consols, with the other he was
creating terminable annuities for naval works. In the year
1897-98 the expenditure out of borrowed money on works was
over £3,000,000. For the year 1898-99 it was £7,000,000.
Before the budget of 1899 the Secretary for War had announced
that the army would follow suit. A military works bill for bar-
racks, etc., was to be introduced on the pattern of the naval
works act. No wonder that while the public supply of stock
was increased and the public demand diminished the private
investor had begun to take alarm, and to anticipate a decline in
British credit.

The effect of this policy was now felt. From no in March,
April, May, 1899, the price of consols fell to 108 in June, 106 in
July, and 105 in August. By the beginning of September the
danger of war with the Transvaal had become apparent; but
consols only fell to 104 in September; and 103 was the average
for October, though war broke out in the second week of that
month. These figures are very significant. More immediate
injury was done to British credit by the financial policy which
preceded the war than by the actual outbreak of the war. Even
after the dimensions of the war came to be more accurately
understood, consols for a long time maintained themselves at



23



National Monetary Commission

about par. The monthly average from January to June, 1900,
was above par, the price for June being loi i\. Let us look at
it in a slightly different way. In the nine months preceding
the Boer war, January to September, 1 899, the main considera-
tions operating on the minds of investors were the increasing
expenditure, the reduction of the sinking fund, and the appre-
hension of trouble in South Africa. The first operated from
January to April, and caused a fall of i point; the second oper-
ated from May to August, and caused a fall of 5 points; the third
operated in September and caused a fall of i point. Then we
take the nine months following, during which the war was in
progress. In October, 1899, the average price of consols was
103^^. In June, 1900, the average price of consols was loi^^.
Such was the strength of British credit, and such the belief of
investors in our financial stability that nine months of unprece-
dentedly costly war only lowered consols by 2 points.

From this moment (June, 1900) there was a pretty steady de-
preciation of British credit down to November, 1901, when con-
sols reached the lowest average monthly point touched during
the war, namely, 9iX- It may be seen now why this depre-
ciation took place and how it could have been prevented. The
occupation of Bloemfontein (March 13) was followed by the
annexation of the Orange Free State (May 28) ; and the occu-
pation of Pretoria (June 5) was followed by the annexation
of the Transvaal Republic (September i). If the military suc-
cesses had been followed by a treaty of peace with guarantees
and indemnity, the longest and most costly period of the war
would have been avoided.

From £635,000,000 in 1899, the lowest point since the Napo-
leonic wars, the national debt rose in consequence of the Boer
war to £703,000,000 in 1901 and to £798,000,000 in 1903. This
was the highest point since 1867, so that the national savings



24



T h



Credit of Nations



of thirty-six years of peace were swept away by national bor-
rowings during three years of war.

The following table shows the movements of the national
debt and of the price of consols from 1894 to 1905.

[Prom return relating to national debt and from statistical abstract.]



Year ending March 3 1-



1894-
1895-
1896-
1897-
1898.
1899-
1900.
1901-
1902.
1903-
1904-
190S-



Reduction
of debt.



S, 000, 000
7, 000, 000
7, 000. 000
7, 000, 000
8, 000, 000
3, 000, 000



[3 , 000, 000]



Increase
of debt.



Average price of

consols for year

ending December.^



7, 000, 000
58, 000, 000
61 , 000, 000
31, 000, 000



2, 000, 000



Price.



lOI

106
1 10

112
I 10
106

99
94
94
90



1893
1894
189s
1896
1897
1898
1899
1900
1901
1902
1903
1904



"To assist the eye in tracing the casual connection I have placed the year ending
December, 1893, opposite to the year ending March, 1894. and so on. The difference
between 2K percents (with the prospect of reduction to 254 percents in 1902) and the
2% percents already existing in 189S was only 2 or 3 points. The quotations here given
are for 2K percents till 1901, and for 2J4 per cents after 1901. I have bracketed the
reduction of 3,000,000 for 1904, because it was due to a returned Transvaal loan and not
to a real surplus of national revenue over national expenditure.

On March 31, 1906, though the Sinking Fund had been re-
stored immediately after the war, the national debt still stood
at £796,000,000. Then, however, Mr. Asquith becoming chan-
cellor of the exchequer, a heroic effort was made to retrieve
the situation, and the national liabilities were reduced by
March 31, 1909, to £754,000,000, a reduction in four years of
no less than £42,000,000. It may cause some surprise that no
recovery should have taken place in the price of consols, which
in fact have been lower in 1909 than in 1905. The state of the
international money market, the heavy issues of colonial gov-



2S



National Monetary Commission

ernment securities and municipal stocks, which of course com-
pete with consols, and the annual emission of some five millions
of Irish land stock are all contributory causes. Had not the
market been supported by this large Sinking Fund there is no
doubt that 2% per cent consols would have fallen well below 80.
Many are of opinion that the inclusion, at Mr. Chamberlain's
suggestion, of colonial government securities among trustee
stocks has also had a very depressing effect upon our premier
security.

II. — Schemes of Conversion.

The history of the English debt includes several successful
schemes of conversion by which the debt charge for interest has
been from time to time reduced, much to the relief of taxpayers.
The need and occasion for schemes of conversion have been in the
periods of peace follov/ing upon great and expensive wars. Dur-
ing war debts have multiplied and rates of interest have risen.
When a war is over the relation between income and expendi-
ture graduaUy becomes normal; and fortunately for this na,tion,
considering its warlike propensities and history, our statesmen
have usually maintained the principle that in time of peace
surpluses ought to be provided for the diminution of debt. A
modern war leaves behind it an awkward legacy of floating
debt, consisting as a rule of treasury bills and exchequer bonds,
which it is the first business of the chancellor of the exchequer
to diminish when a period of peace recommences. When this
task is accomplished and the floating debt has been reduced to
comfortable proportions, the sinking fund can be utilized for the
purchase of funded debt. Then, if market conditions are fa-
vorable, consols and other national securities will begin to recover
from the depression into which they were sunk by war and bor-
rowing. This is the opportunity for a conversion. In the pre-
ceding history we have already recorded the first important and
highly successful scheme of conversion, which was carried

26



The Credit of Nations

through by Pelham, then chancellor of the exchequer, in 1749.
Under his scheme over £57,000,000 of 4 per cent stock were
dealt with. The offers to holders were accepted with regard to
£54,000,000, and the outstanding balance of £3,290,000 was
paid oflf at par. The next important conversion was under-
taken by Vansittart in 181 8, three years after the conclusion of
the Napoleonic wars. But this was a conversion from a lower
to a higher denomination, as the Government wanted to raise
£3,000,000 sterling of money without increasing the nominal
amount of the debt. The object was effected by converting
£27,272,000 of 3 percents standing then at 79, into 3^ per cent
stock at par, irredeemable for eleven years, the holders paying £11
in cash to the Government for every £ 1 00 in stock converted. In
1822 Vansittart carried through a scheme of conversion on the
ordinary lines. There existed at the time over £150,000,000 of
5 per cent stock consisting partly of "navy fives," representing
the old victualling and transport bills, which had been funded in
1784, and partly of exchequer bills, subsequently funded. At
the time of the operation the 5 percents were quoted at 100^.
Under the statute by which the conversion was effected (3 Geo.
IV, c. 9), holders who did not signify dissent within a fortnight


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