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were to have every £100 of this stock converted to £105 of new
stock, on which interest at the rate of 4 per cent was guaranteed
for seven years. Holders of only £2,794,000 of stock dissented,
and were paid off at par. The old fives, to the amount of
£149,627,000, were converted into the new 4 percents to the
amount of £157,109,000. Two years later, in 1824, when Robin-
son was chancellor of the exchequer, the whole of the old 4 per-
cents then amounting to £76,248,000 and standing at loij^ ex.
dividend was converted by the act of 5 George IV, chapter 1 1 , into
2,% per cent stock irredeemable for five years. The new 4 per-
cents, created as we have seen by Vansittart in 1822, became
redeemable in 1829; and in 1830, when the new fours stood at


National Monetary Commission

io2}4 ex. dividend, and 3^2 percents at 98^^ ex. dividend, Goul-
burn as chancellor of the exchequer, oflfered holders an alterna-
tive. They might either take in exchange for their stock £100
of new 3>^ percents, guaranteed for ten years, or £70 of new
5 percents guaranteed for forty-two years. The proposal was
made on March 26, 1830, and the assent of holders was assumed
unless they dissented by the 24th of April. Holders of only
£2,880,000 dissented, and were paid off at par. The rest, with
holdings of £150,790,000, accepted the proposal and nearly all
of them chose 3>^ percents. Another small quantity of fours
was converted in 1834 by Lord Althorp.

In 1844, whenGoulburn was again chancellor of the exchequer,
under Sir Robert Peel, a very large and highly successful scheme
of conversion was carried through. The 33^ percents to the
amount of £248,000,000 sterling stood, in March, 1844, at loi^i
ex. dividend. In exchange for these, new stock bearing interest at
3X per cent for ten years and at 3 per cent for twenty years was
offered, and with the exception of £103,352 the whole of the 3^
percents, amounting to no less than £248,757,000, were success-
fully converted. In 1853 the ingenious mind of Gladstone, who
had lately become chancellor of the exchequer for the first time,
set itself upon another effort to diminish interest on the na-
tional debt. Unfortunately his scheme was too clever or too
complicated, and the times were unpropitious; for troubles be-
gan to arise in Eastern Europe and the price of securities drooped
in intelligent anticipation of the Crimean war. Another con-
version was tried in 1884 under Mr. Gladstone's 2nd administra-
tion by Mr. Childers, who offered all holders of 3 percents either
£102 of 2^ per cent stock, or £108 of 2]4 per cent stock, both to
be irredeemable until 1905. "Notwithstanding that the terms
of the offer were favorable," wrote the late Sir Edward Hamil-
ton, "and that notices of it were sent to every stockholder, it
took the fancy of comparatively few. The total amount of

The Credit of Nations

stocks converted under this scheme was only £23,362,000, of
which £11,950,000 represented holdings of government depart-
ments." The Childers's scheme, however, served several useful
purposes, as Sir Edward Hamilton pointed out, for it supplied
Mr. Goschen four years later with a valuable gauge of the na-
tional credit, and familiarized the public with stocks of lower
denomination and of less "sweet simplicity" than 3 percents.
It also brought home to many holders the fact that, though they
had not been disturbed for thirty years, they were not secure
against the intervention of the chancellor of the exchequer.

This brings us to the last, the most important, the most diffi-
cult, and the most successful of all the schemes of redemption —
that, namely, which was effected by the late Lord Goschen,
when,, as Mr. Goschen, he was chancellor of the exchequer in
1888. At that time the existing 3 per cent stocks were distin-
guished as consols, reduced threes, and new threes. The new
threes were redeemable at any time after January 5, 1873;
but under the national-debt act of 1870, which was a consoli-
dation act, consols and reduced threes, though "redeemable at
any time after the passing of this act," were only redeemable
subject to certain regulations, including a year's notice. The
result was that the fortress of consols and reduced threes was a
more difficult one to assault than that of the new threes. After
consultation with his advisers at the Treasury and at the Bank
of England, as well as with the government broker and various
other authorities in the city, Mr. Goschen came to the conclu-
sion that, while he was in a position to make a compulsory con-
version of the new threes, he could not apply the same method
to the other two classes. The stocks in existence at this time
stood as follows :

Consols £32 2 , 68 1 , 000

Reduced threes. 68,912,000

New threes 166, 399,000

82300°— 10 3 39

National Monetary Commission

To show the magnitude of the task, it may be mentioned that
at the time of the conversion the books of the Bank of England
in which the stocks were inscribed showed 96,265 accounts under
the head, of consols, 19,975 accounts under the head of reduced
threes, and 52,995 accounts under the head of new threes; mak-
ing a total number of 169,235 holdings varying in amount from
a penny to £5,760,000. Mr. Goschen propounded his scheme
of conversion on March 9, 1888, and after some debate the reso-
lutions were reported and agreed to on the 12th, when the bill
was introduced into the House of Commons and read a first
time. It was read a second time on March 16, passed through
its committee stages on the 20th and 21st, and received the
royal assent on March 27 in an act entitled "The National Debt
Conversion Act, 1888" (51 Vict., c. 2). The main feature of
the scheme was the creation of new stock which was to be
offered to all holders of 3 percents. This new stock was to pay
quarterly dividends at the rate of 3 per cent per annum for the
year ending April 5, 1889, at the rate of 2^ per cent for the
next fourteen years, ending April 5, 1903, and at 2>< per cent
for the next twenty years ending April 5, 1923, and thencefor-
ward until the stock should be redeemed. To the holders of
new threes the chancellor of the exchequer only gave three
weeks, i. e., until March 29, in which they could exercise the
choice of taking new stock or of being paid off. Silence meant
consent to conversion. If they preferred redemption, they were
required to signify their dissent either to the Bank of England
or to the Bank of Ireland within the three weeks prescribed,
but holders who happened to be on the Continent were given
to May I, and those who were out of Europe until September i.
This financial coup de main was completely successful; for the
new threes remained at a premium after the notice of compulsory-
conversion had been served, so that holders who did not want
new stock could sell to the market on terms more favorable than


The Credit of Nations

those offered by the chancellor of the exchequer. The holders
of new threes who signified dissent before the 29th of March
represented less than £500,000 of stock. For the holders of
consols and reduced threes Mr. Goschen inverted the procedure.
They received the same offer of conversion, but silence was taken
to mean dissent. If they wished to exchange their stock for
an equal nominal amount of new stock, they must signify assent
on or before April 12, or at later dates if they were on the Con-
tinent or out of Europe. To encourage them to surrender
their privilege of a year's notice, holders of consols or reduced
threes who assented were offered a bonus of 5 per cent on the
stock surrendered. This bait proved attractive, and in the
following autumn it appeared in a parliamentary return ^ that
out of a total amount of about £592,000,000 of 3 percents dealt
with under the conversion act, about £550,000,000 had, in six
months, been converted into 2^ percent stock, the old stock,
which remained unconverted at the end of the operations,
being less than £42,500,000. Had it been necessary to raise
much money for the purpose of paying off dissenting holders of
new threes, ample powers were given to the treasury — it might
create or sell new stock ; it might issue exchequer - bills or
treasury bills; or again it might borrow temporarily under the
conversion act. Mr. Goschen and his advisers deserved the
greatest credit for the extraordinary skill with which this cam-
paign was conducted, and there is no doubt that its success
was partly due to the favorable reception which Mr. Goschen's
masterly speech on the 9th of March secured for it in the city
of London. It is hoped that this brief history may be of use
to those who are concerned with public finance. It will at any
rate enable the reader to understand how it is that British
consols are now a 2Xper cent security.

« House of Commons Papers, c. 5584, sess. 1888.


National Monetary Commission

III. — The History of the Sinking Fund.

During the eighteenth century, as Adam Smith observes,
and as we have already shown, the reduction of the public
debt in time of peace never bore any proportion to its accumu-
lation in time of war. Yet the danger of a large public debt
and the fear of impending bankruptcy were constantly impressed
on the public mind by writers and statesmen. Sinking funds
were devised by which the debt should gradually be extin-
guished. But unfortunately the management of the debt,
both in its theory and in its practice, left much to be desired.
A true sinking fund postulates an excess of revenue over ex-
penditure, a margin over and above what is required for the
public services and for defraying interest on the public debt.

But during the most profound peace, to quote again the
author of "The Wealth of Nations," various events occur
which require extraordinary expenditure, and the Government
finds it more convenient to provide the money by dipping into
the sinking fund than by imposing a new tax :

"Every new tax is immediately felt more or less by the
people. It occasions always some murmur and meets with
some opposition. The more taxes may have to be multiplied,
the higher they may have been raised upon every different
subject of taxation, the more loudly the people complain of
every new tax, the more difficult it becomes either to find out
new subjects of taxation or to raise much higher the taxes
already imposed upon the old. A momentary suspension of
the payment of debt is not immediately felt by the people and
occasions neither murmur nor complaint. To borrow of the
sinking fund is always an obvious and easy expedient for getting
out of the present difficulty. The more the public debts may
have been accumulated, the more necessary it may have become
to study to reduce them, the more dangerous, the more omi-
nous it may be to misapply any part of the sinking fund the less


The Credit of Nations

likely is the public debt to be reduced to any considerable
degree, and the more likely, the more certainly is the sinking
fund to be misapplied toward defraying all the extraordinary
expenses which occur in time of peace. When a nation is
already overburdened with taxes, nothing but the necessities
of a new war, nothing but either the animosity of national
vengeance or the anxiety for national security can induce the
people to submit with tolerable patience to a new tax. Hence
the usual misapplication of the sinking fund."

The first regular and systematic plan for the discharge of the
national debt was devised by Lord Stanhope and adopted by
Sir Robert Walpole's government in 1716. The public debts
were then being discharged by the South Sea, aggregate and
general funds, which funds were fed by the produce of certain
taxes; and as the revenues thus mortgaged were greater than
the interest on the debts, surpluses existed. Accordingly these
surpluses, and any further surpluses which might accrue, were
united and appropriated by law for the discharge of the national
debt and for that purpose alone. The fund thus created by
Walpole was called the sinking fund. At the same time inter-
est on the debt was reduced from 6 to 5 per cent, and the
savings thus made went to swell the sinking fund, which again
benefited to the extent of £400,000 per annum in 1727, when
the interest on the national debt was further reduced from 5
to 4 per cent. Further reductions in 1749 and 1750 added
another £600,000 to the sinking fund. In the peaceful years
1 7 10 to 1732 the sinking fund was preserved intact even when
fresh debt was being contracted. But in 1733, rather than
raise the land tax (which then stood at the low and popular
rate of one shilling in the pound), a sum of £500,000 was sub-
tracted from the sinking fund; in 1734 £1,200,000 was taken,
and in 1735 the sinking fund itself was anticipated and mort-


National Monetary Commission

After 1718, when the sinking fund was established, it was
made a collateral security for any new loan in this way. If the
particular tax or duty upon which a new loan was charged
proved deficient, the deficiency was made up by the sinking
fund, whereas when the tax yielded more than was required
for the service of the loan, the surplus, instead of swelling
the sinking fund, was used for the expenditure of the year.
But this was altered by a statute of 1752, by which the sink-
ing fund received the new taxes and discharged the interests
on the new loans. The produce of this sinking fund rose
pretty steadily from £323,000 at its commeucement in 1717 to
£3,166,100 (its highest point) in 1776.

But if the proper purpose of Walpole's sinking fund be to
sink — i. e., to extinguish or diminish debt — this fund certainly
failed of its purpose after 1733, for out of its annual produce
after that date, until the termination of the fund in 1786, only
8^ millions sterling went to paying off debt. "On the whole,
therefore," to quote the summing up of Robert Hamilton,
"this fund did little in time of peace and nothing in time of
war to the discharge of the national debt. The purpose of its
inviolable application was abandoned, and the hopes enter-
tained of its powerful efficacy entirely disappointed."

In 1786, when Pitt united the existing branches of rev-
enue in the consolidated fund, he took from this fund the
sum of £1,000,000 annually and intrusted it to commis-
sioners for the redemption of the national debt who were
to employ it in purchasing such stock as they deemed ex-
pedient at market prices. To this million was to be added
interest on debt redeemed and expiring annuities until the
fund amounted to £4,000,000. In 1792 another and sepa-
rate sinking fund was established, consisting of i per cent
on the nominal capital of every loan* to which the dividends

o As a matter of fact this provision was frequently departed from during
the war.


The Credit of Nations

on the capital redeemed by the fund were to be added. A
similar provision was applied to annuities. In 1802 the two
sinking funds were united and modifications made. In 1807
Lord Henry Petty introduced a new plan, which lasted for
one year, and in 181 3 Vansittart again modified Pitt's sinking
funds with a view to reestablish as far as possible the original
design. The sinking funds of 1780 and 1792, which were after-
wards maintained with remarkable persistency during the
wars with France, were originally established by Pitt, under
the influence and inspiration of Doctor Price. Price's theories
first appeared in a Treatise on Reversionary Annuities in 1771,
and were finally exploded by Robert Hamilton in his "Inquiry
concerning the national debt." Price's plan for redeeming the
national debt was to apply a fixed sum, separated from the
rest of the revenue, to the purchase of stock in the market,
the interest on the debt so redeemed being always added to the
original sum, so continually to enlarge the operation of the
fund. Price put his faith in the operation of compound inter-
est. Money, he said, bearing compound interest increases at
first slowly, but the rate continually accelerating becomes in
course of time so rapid as to mock all the powers of the imagi-
nation. It followed, he thought, that a sinking fund should
be based on compound interest, that it should be maintained
in war time, and that the money required for it should be
raised by new loans if necessary. Indeed, he actually contended
that war would increase efficacy of his sinking fund, and that
a suspension of the sinking fund during war would be "the
madness of giving it a mortal blow" at the very time when
it was making progress most rapidly. That a man of high
character and liberal talents, an expert calculator to boot,
could have imposed upon himself to such an extent is hard
to believe. But it is still more incredible that such a piece of
charlatanry imposed upon Pitt and governed British finance


N at i 71 a I Monetary Commission

for a generation. Of the influence of Price's plan Hamilton
writes: "It has not shared the common fate of the projects of
private individuals and vanished in neglect and oblivion.
It is the basis of Mr. Pitt's sinking fund, adopted fifteen years
after its first publication, and now followed out for upward
of thirty years, and although with some deviations, yet on the
whole with a steadiness seldom experienced in public measures
for so great a length of time and under a succession of different
administrations." Doctor Price argued further that in time
of war his sinking fund would support the price of consols.
But, as Hamilton points out in his crushing analysis, the price
of stocks as of other commodities depends on supply and
demand. In years when the Government borrows as much as,
or more than, it spends on canceling debt, it is clear that what-
ever sums are brought into the market by the commissioners
for the purchase of stock equal or greater sums must be with-
drawn from the market by the additional loans required to
replace the amounts given to the commissioners. If, then,
and so far as purchases on behalf of the sinking fund are only
made possible by borrowing, it is impossible that the national
credit can receive support by a sinking fund maintained under
such conditions. Price proposed that £10,000,000 should be
borrowed in time of war, when £9,000,000 only are required
to balance income and outgo, in order that a surplus million
may be given to the commissioners of the sinking fund, and
urged that this device would keep up the public credit and
enable the Government to borrow at, say, 4>< instead of 5 per
cent and so save £50,000 of interest. What he overlooked
was that in order to pay the lenders back £1,000,000 the
Government was borrowing from them previously the same
sum. The only people who benefit by the double transac-
tion are the financiers who profit by the loan issues. The
taxpayer loses just what they gain, and public credit can not


The Credit of Nations

be better and must suffer from the unnecessary expense. In
practice the Pitt sinking funds were even worse than in theory.
It was calculated by a parliamentary inquiry in 1828 that
,the loans raised during the French war yielded on an average
£5 OS. 6d. in interest, while the previous loans to which the
sinking fund was applied averaged only £4 ids. In fact the
Price and Pitt plan of "selling new stock cheap and buying
old stock dear" in order to keep up a sinking fund during war,
is computed to have cost the nation more than £1,500,000 a
year for a long period.

I have explained this fallacy and its exposure not so much
on account of the important part it played during the wars
with France, as because it is constantly cropping up. It is the
practice of governments all over the world to attach sinking
funds to loans, though their debts are year by year increasing.
They forget or ignore the simple truth that an excess of revenue
over expenditure is the only real sinking fund by which public
debt can be discharged, that the increase of revenue or diminu-
tion of expenditure are the only means by which such a sinking
fund can be enlarged, and that all schemes for reducing the
aggregate liabilities of a nation which are not founded upon
this principle are fictitious, illusory, and mischievous. In 181 9
the force of Hamilton's criticisms was recognized, and a real
surplus of four millions was set aside for repayment of debt.
But financial embarrassments intervened, though another
attempt was made in 1823. Finally, in 1828, a finance com-
mittee of the House of Commons (presided over by Sir PI. Par-
nell), after inquiry "found" what Hamilton had proved, that
the only real and useful sinking fund is a surplus, and suggested
that a surplus of three millions a year should be provided. In
his budget speech of July 11, 1828, Goulburn made some rec-
ommendations on these lines, and in the following year an act
(10 Geo. IV, c. 27) was passed providing that one-fourth of the


7 1 ^. S 9

s JL s^ ■-) yf

National Monetary Commission

whole surplus (if any) in each year should be issued to the
national debt commissioners and applied by them to the extinc-
tion of debt. The commissioners were also authorized to use
the surplus for paying off exchequer or deficiency bills as well
as funded debt. In 1866 Mr. Gladstone assigned a small annual
sum to the extinction of debt and reconstituted the old sinking
fund by providing that the whole reahzed surplus of the year,
if any, should be apphed to the reduction of debt, a very wise
provision, under which, in years of expanding trade and abnor-
mal prosperity, unexpected windfalls and overflows of revenue
are employed of necessity to reduce the national encumbrances.
Thus debt is diminished just when the nation can best afford
to do something for posterity. But Mr. Gladstone's legislation
of 1866 still left British finance open to the objection that in
years of peace there was no substantial permanent provision
for reducing debt and that if an incautious Chancellor of the
Exchequer overestimated his revenue there would be an actual
addition to the debt. This defect was happily remedied by
Sir Stafford Northcote, who established what is called the new
sinking fund in 1875, by the act of 38 and 39 (Vict., c. 45).
This act provided that the annual charge for the debt should
exceed by a substantial and increasing sum the actual interest
required, and that this excess of charge over interest should be
employed by the commissioners of the national debt in reduc-
ing national liabilities. This new sinking fund has always been
temporarily suspended by statute during war in obedience to
the principles above established, and it has been from time to
time modified and reduced. The principle, however, that a
permanent sinking fund of a substantial amount should be pro-
vided for in every peace budget, in addition to realized surpluses,
has been on the whole well maintained, and in fact the largest
reductions ever brought about in the national debt were efi"ected
by Mr. Asquith as Chancellor of the Exchequer in the years


The Credit of Nations

1906, 1907, and 1908, through the operations of the old and
new sinking funds, the latter having been raised to some ten
millions sterling annually, though reduced to seven by Mr.
Lloyd George in the budget of 1909.

Mr. Lloyd George also proposed to divert the old sinking
fund, i. e., the annual surplus, if any, of each year, to the pur-
poses of developing the agriculture, forests, and other natural
resources of the country. But this proposal was fortunately
dropped, and the old sinking fund remains as it stood in its
final form under section 5 of the Sir Stafford Northcote's Act
(38 and 39, Vict., c. 45). By this section the treasury is di-
rected to ascertain within fifteen days after the expiration of
each financial year any surplus of income over expenditure and
to issue the same out of the consolidated fund in the course of
the year. Within six months of the date of such issue the
national debt commissioners are required to apply the sinking
fund in purchasing, redeeming, or paying off any one or more
of the following descriptions of debt, namely, annuities, per-
petual or terminable charged on the consolidated fund, ex-
chequer bonds, exchequer bills, and advances made by the
Banks of England or Ireland under section 12 of the ex-
chequer audit act 1866. By an act of 1877 (40 Vict., c. 2)
these powers of cancellation were extended to treasury bills.

IV. — The Local Debt of England and Wales.

No account of the national liabilities of the United Kingdom

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Online LibraryFrancis Wrigley HirstThe credit of nations → online text (page 3 of 16)