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ESSAY ON THE FUNDING SYSTEM, - David Ricardo, The Works of David Ricardo (McCulloch ed.) 
The Works of David Ricardo. With a Notice of the Life and Writings of the Author, by J.R. McCulloch (London: John Murray, 1888).
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ESSAY ON THE FUNDING SYSTEM,
Under this head we propose, first, to give an account of the rise, progress, and modifications of the SINKING FUND, accompanied with some observations as to the probability of its accomplishing the object for which it was instituted; and next, briefly to consider the best mode of providing for our annual expenditure both in war and peace,—an inquiry necessarily involving the policy of that SYSTEM OF FUNDING of which the sinking fund was long considered as one of the principal recommendations and props.
I. On the subject of the sinking fund, we shall have frequent occasion to refer to the statements of Professor Hamilton, in his very valuable publication entitled “An Inquiry concerning the Rise and Progress, the Redemption, and Present State of the National Debt of Great Britain.” “The first plan for the discharge of the national debt, formed on a regular system, and conducted with a considerable degree of firmness,” says this able writer, “was that of the sinking fund, established in 1716. The author of this plan was the Earl of Stanhope; but as it was adopted under the administration of Sir Robert Walpole, it is commonly denominated from him. The taxes which had before been laid on for limited periods, being rendered perpetual, and distributed among the South Sea, Aggregate, and General Funds, and the produce of these funds being greater than the charges upon them, the surplusses, together with such further surplusses as might afterwards accrue, were united under the name of the Sinking Fund, being appropriated for the discharge of the national debt, and expressly ordained to be applicable to no other purpose whatever. The legal interest had been reduced from 6 to 5 per cent. about two years before; and as that reduction was unfavourable to the commercial state of the country, Government was now able to obtain the same reduction on the interest of the public debt, and apply the savings in aid of the sinking fund. In 1727 a further reduction of the interest of the public debt, from 5 to 4 per cent. was obtained, by which nearly 400,000l. was added to the sinking fund. And, in the year 1749, the interest of part of the debt was again reduced to 3½ per cent. for seven years, and to 3 per cent. thereafter; and, in 1750, the interest of the remainder was reduced to 3½ per cent. for five years, and to 3 per cent, thereafter, by which a further saving of about 600,000l. was added to the sinking fund.”
This sinking fund was for some time regularly applied to the discharge of debt. The sums applied from 1716 to 1728 amounted to 6,648,000l., being nearly equal to the additional debt contracted in that time. From 1728 to 1733, 5,000,000l. more were paid. The interest of several loans, contracted between 1727 and 1732, was charged upon surplus duties, which, according to the original plan, ought to have been appropriated to the sinking fund.
“Soon after, the principle of preserving the sinking fund inviolable was abandoned. In 1733, 500,000l. was taken from that fund, and applied to the services of the year.” “In 1734, 1,200,000l. was taken from the sinking fund for current services; and in 1735 it was anticipated and mortgaged.” The produce of the sinking fund at its commencement in 1717, was 323,437l. In 1776, it was at its highest amount, being then 3,166,517l.; in 1780, it had sunk to 2,403,017l.
The sinking fund would have risen higher, had it not been depressed, especially in the latter period, by various encroachments. It was charged with the interest of several loans, for which no provision was made; and, in 1772, it was charged with an annuity of 100,000l., granted in addition to the civil list. During the three wars which were waged while it subsisted, the whole of its produce was applied to the expense of the war; and even in time of peace, large sums were abstracted from it for current services. According to Dr Price, the amount of public debt paid off by the sinking fund, since its first alienation in 1733, was only 3 millions, paid off in 1736 and 1737; 3 millions in the peace between 1748 and 1756; 2½ millions in the peace between 1763 and 1775; in all 8½ millions.
The additional debt discharged during these periods of peace was effected, not by the sinking fund, but from other sources.
“On the whole, 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 entertained of its powerful efficacy entirely disappointed. At this time, the nation had no other free revenue, except the land and malt-tax granted annually; and as the land-tax during peace was then granted at a low rate, their produce was inadequate to the expense of a peace establishment, on the most moderate scale. This gave occasion to encroachments on the sinking fund. Had the land-tax been always continued at 4s. in the pound, it would have gone far to keep the sinking fund, during peace, inviolate.”
This fund terminated in 1786, when Mr Pitt's sinking fund was established.
To constitute this new fund, 1 million per annum was appropriated to it by Parliament, the capital stock of the national debt then amounting to 238,231,248l.
This million was to be allowed to accumulate at compound interest, by the addition of the dividends on the stock which it purchased, till it amounted to 4 millions, from which time it was not further to increase. The four millions were then annually to be invested in the public funds as before, but the dividends arising from the stock purchased were no longer to be added to the sinking fund for the purpose of being invested in stock; they were to be applied to the diminution of taxes, or to any other object that Parliament might direct.
A further addition to this fund was proposed by Mr Pitt, and readily adopted in 1792, consisting of a grant of 400,000l. arising from the surplus of the revenue, and a further annual grant of 200,000l.; but it was expressly stipulated that no relief from taxation should be given to the public, as far as this fund was concerned, till the original million, with its accumulations, amounted to 4 millions. The addition made to the fund, by the grant of 400,000l., and of 200,000l. per annum, together with the interest on the stock these sums might purchase, were not to be taken or considered as forming any part of the 4 millions. At the same time (in 1792), a sinking fund of a new character was constituted. It was enacted, that besides a provision for the interest of any loan which should thenceforward be contracted, taxes should also be imposed for a 1 per cent. sinking fund on the capital stock created by it, which should be exclusively employed in the liquidation of such particular loan; and that no relief should be afforded to the public from the taxes which constituted the 1 per cent. sinking fund, until a sum of capital stock, equal in amount to that created by the loan, had been purchased by it. That being accomplished, both the interest and sinking fund were to be applicable to the public service. It was calculated, that, under the most unfavourable circumstances, each loan would be redeemed in forty-five years from the period of contracting it. If made in the 3 per cent., and the price of that stock should continue uniformly at 60. the redemption would be effected in twenty-nine years.
In the years 1798, 1799, and 1800, a deviation was made from Mr Pitt's plan of providing a sinking fund of 1 per cent. on the capital stock created by every loan; for the loans of those years had no sinking fund attached to them. The interest was charged on the war-taxes; and, in lieu of a 1 per cent. sinking fund, it was provided that the war-taxes should continue during peace, to be then employed in their redemption, till they were all redeemed.
In 1802, Lord Sidmouth, then Mr Addington, was chancellor of the exchequer. He being desirous of liberating the war-taxes from the charges with which they were encumbered, proposed to raise new annual permanent taxes for the interest of the loans of which we have just spoken, as well as for that which he was under the necessity of raising for the service of the year 1802; but he wished to avoid loading the public with additional taxes for a 1 per cent. sinking fund on the capitals created by those loans, and which capitals together amounted to 86,796,375l. To reconcile the stockholder to this arrangement, he proposed to rescind the provision which limited the fund of 1786 to 4 millions, and to consolidate the old and the new sinking funds, i. e. that which arose from the original million per annum, with the addition made to it of 200,000l. per annum subsequently granted, and that which arose from the 1 per cent. on the capital of every loan that had been contracted since 1792. These combined funds he proposed should, from that time, be applied to the redemption of the whole debt without distinction; that the dividends arising from the stock purchased by the commissioners for the reduction of the national debt should be applied in the same manner; and that this arrangement should not be interfered with till the redemption of the whole debt was effected.
In February 1803 the debt amounted to 480,572,470l., and the produce of the joint sinking fund to 6,311,626l. In 1786 the proportion of the sinking fund to the debt was as 1 to 238, in 1792 as 1 to 160, and in 1803 as 1 to 77.
This was the first deviation of importance from Mr Pitt's plan; and this alteration made by Lord Sidmouth was not, perhaps, on the whole, injurious to the stockholder. He lost, indeed, the immediate advantage of an additional sinking fund of 867,963l., the amount of 1 per cent. on the capitals created by the loans of 1798, 1799, 1800, and 1802; “but in lieu,” says Mr Huskisson, “of this sinking fund, a reversionary sinking fund was created, to commence, indeed, in about twelve to fifteen years from that time, but to be of such efficacy when it should commence, and to be so greatly accelerated by subsequent additions in its progress, as, under the most unfavourable supposition, to be certain of reducing the whole of this debt within forty-five years. This reversionary sinking fund was to arise in the following manner; by continuing the old sinking fund at compound interest, after it should have reached its maximum of 4 millions; and by continuing also the new sinking fund or aggregate of the 1 per cents. of the loans since 1792, after such 1 per cents. should have liquidated the several loans in respect of which they are originally issued. There is nothing, therefore, in the act of 1802 which is a departure from the spirit of the act of 1792.”∗
The next alteration that was proposed to be made in the sinking fund was in 1807, by Lord Henry Petty, then chancellor of the exchequer. His plan was extremely complicated, and had for its object, that which ministers are too much disposed at all times to view with complacency, namely, to lessen the burden of taxation at the present, with the certainty of aggravating its pressure at a future day.
It was estimated by Lord Henry Petty, that the expenses of the country during war would exceed its permanent annual revenue by 32 millions. For 21 millions of this deficiency provision was made by the war-taxes; the property-tax amounting to 11,500,000l., and the other war-taxes to 9,500,000l. The object then was to provide 11 millions per annum. If this sum had been raised by a loan in the 3 per cents., when their price was 60, provision must have been made by taxes for the interest and sinking fund, so that each year we should have required additional taxes to the amount of 733,333l. But Government wished to raise the money without imposing these additional taxes, or by the imposition of as few as circumstances would permit. For this purpose they proposed to raise the money required by loan, in the usual way, but to provide, out of the war-taxes, for the interest and redemption of the stock created. They proposed to increase the sinking fund of every such loan, by taking from the war-taxes 10 per cent. on its amount for interest and sinking fund, so that if the interest and management absorbed only 5 per cent., the sinking fund would also amount to 5 per cent.; if the interest amounted to 4 per cent. the sinking fund would be 6 per cent. The sums proposed to be borrowed in this manner were 12 millions for the first three years, 14 millions for the fourth, and 16 millions for each succeeding year; making together, in 14 years, 210 millions, for which, at the rate of 10 per cent., the whole of the war-taxes would be mortgaged. It was calculated, that, by the operation of the sinking fund, each loan would be paid off in fourteen years from the time of contracting it; and, therefore, the 1,200,000l. set apart for the interest and sinking fund of the first loan would be liberated and available for the loan of the fifteenth year. At the end of fifteen years a like sum would be set free, and so on each succeeding year; and thus loans might be continued, on this system, without any limitation of time.
But these successive sums could not be withdrawn from the war-taxes, for interest and sinking fund on loans, and be at the same time applied to expenditure; and, therefore, the deficiency of 11 millions, for which provision was to be made, would, from year to year, increase as the war-taxes became absorbed; and at the end of fourteen years, when the whole 21 millions of the war-taxes would be absorbed, instead of 11 millions the deficiency would be 32 millions.
To provide for this growing deficiency, it was proposed to raise supplementary loans, increasing in amount from year to year, and for the interest and sinking fund on such loans provision was to be made in the usual way, by annual permanent taxes; on these loans the sinking fund was not to be more than 1 per cent.
By the plan proposed, in fifteen years from its commencement, on the supposition of the war continuing so long, the regular loan would have been 12 millions, and the supplementary loan 20 millions.
If the expenses of the war should have exceeded the estimate then made, provision for such excess was to have been made by other means.
The ministry who proposed this plan not continuing in office, it was acted upon only for one year. “In comparing the merit of different systems,” says Dr Hamilton, “the only points necessary to be attended to are the amount of the loans contracted—the part of these loans redeemed—the interest incurred—and the sums raised by taxes. The arrangements of the loan under different branches, and the appropriation of particular funds for payment of their respective interests, are matters of official regulation; and the state of the public finance is neither the better nor the worse, whether they be conducted one way or other. A complicated system may perplex and mislead, but it can never ameliorate.” Accordingly, Dr Hamilton has shown, that the whole amount of taxes that would have been paid in twenty years, for an annual loan of 11 millions on the old plan of a sinking fund of 1 per cent., would be 154 millions. On Lord Henry Petty's plan, these taxes would, in the same time, have been 93 millions,—a difference in favour of Lord Henry Petty's plan of 51 millions; but to obtain this exemption we should have been encumbered with an additional debt of 119,489,788l. of money capital, which, if raised in a 3 per cent. stock at 60, would be equal to a nominal capital of 199,149,646l.
The sinking fund was established with a view to diminish the national debt during peace, and to prevent its rapid increase during war. The only wise and good object of war-taxes is also to prevent the accumulation of debt. A sinking fund and war-taxes are only useful while they are strictly applied to the objects for which they are raised; they become instruments of mischief and delusion when they are made use of for the purpose of providing the interest on a new debt.
In 1809 Mr Perceval, who was then chancellor of the exchequer, mortgaged 1,040,000l. of the war-taxes for the interest and sinking fund of the stock he funded in that year.
By taking more than a million from the war-taxes, not for the annual expenditure, but for the interest of a loan, Mr Perceval rendered it necessary to add 1 million to the loan of the next and all following years; so that the real effect of this measure differed in no respect from one which should have taken the same sum annually from the sinking fund.
In 1813, the next and most important alteration was made in the sinking fund. Mr Vansittart was then chancellor of the exchequer. It has been already observed, that the national debt amounted to 238,231,248l. in 1786, when Mr Pitt established his sinking fund of 1 million. By the act of 1786, as soon as the sum of 1 million amounted, by the aid of the dividends on the stock which was to be purchased by it, to 4 millions, its accumulation was to cease, and the dividends on the stock purchased were to be available for the public service. If the 3 per cents. were at 60 when this million had accumulated to 4 millions, the public would have had a disposable fund of 20,000l. per annum; if at 80, of 15,000l. per annum; and no other relief was to be given to the public till the 4 millions had purchased the whole sum of 238 millions, the then amount of the debt. In 1792 Mr Pitt added 200,000l. per annum to the sinking fund, and accompanied it by the following observations:—“When the sum of 4 millions was originally fixed as the limit for the sinking fund, it was not in contemplation to issue more annually from the surplus revenue than 1 million, consequently the fund would not rise to 4 millions till a proportion of debt was paid off, the interest of which, together with the annuities which might fall in in the interval, should amount to 3 millions. But as, on the present supposition, additional sums beyond the original million are to be annually issued from the revenue, and applied to the aid of the sinking fund, the consequence would be, that if that fund, with these additions carried to it, were still to be limited to 4 millions, it would reach that amount, and cease to accumulate, before as great a portion of the debt is reduced as was originally in contemplation.” “In order to avoid this consequence, which would, as far as it went, be a relaxation in our system, I should propose, that whatever may be the additional annual sums applied to the reduction of debt, the fund should not cease to accumulate till the interest of the capital discharged, and the amount of the expired annuities should, together with the annual million only, and exclusive of any additional sums, amount to 4 millions.”∗
It will be recollected, that in 1792 a provision was made for attaching a sinking fund of 1 per cent. to each loan separately, which was to be exclusively employed in the discharge of the debt contracted by that loan; but no part of these 1 per cents. were to be employed in the reduction of the original debt of 238,000,000l. The act of 1802 consolidated all these sinking funds, and the public were not to be exempted from the payment of the sinking fund itself, nor of the dividends on the stock to be purchased by the commissioners, till the whole debt existing in 1802 was paid off. Mr Vansittart proposed to repeal the act of 1802, and to restore the spirit of Mr Pitt's act of 1792. He acknowledged that it would be a breach of faith to the national creditor, if the fair construction of that act, the act of 1792, were not adhered to. It was, in Mr Vansittart's opinion, no breach of faith to do away the conditions of the act 1802. Supposing, however, that the act of 1802 had been really more favourable to the stockholder than that of 1792, it is not easy to comprehend by what arguments it can be proved not to be a breach of faith to repeal the one and enact the other. Were not all the loans from 1802 to 1813 negotiated on the faith of that act? Were not all bargains made between the buyer and seller of stock made on the same understanding? Government had no more right to repeal the act of 1802, and substitute another less favourable to the stockholder, and acknowledged to be so by the minister himself, than it would have had to get rid of the sinking fund altogether. But what we are at present to inquire into is, whether Mr Vansittart did as he professed to do? Did he restore the stockholder to all the advantages of the act of 1792? In the first place, it was declared by the new act, that as the sinking fund consolidated in 1802, had redeemed 238,350,143l. 18s. 1d, exceeding the amount of the debt in 1786 by 118,895l. 12s. 10½d., a sum of capital stock equal to the total capital of the public debt existing on the 5th January 1786, viz. 238,231,248l. 5s. 2¾d. had been satisfied and discharged; “and that in like manner an amount of public debt equal to the capital and charge of every loan contracted since the said 5th January 1786, shall successively, and in its proper order, be deemed and declared to be wholly satisfied and discharged, when and as soon as a further amount of capital stock, not less than the capital of such loan, and producing an interest equal to the dividends thereupon, shall be so redeemed or transferred.”
It was also resolved, “that after such declaration as aforesaid, the capital stock purchased by the commissioners for the reduction of the national debt shall from time to time be cancelled; at such times, and in such proportions, as shall be directed by any act of Parliament to be passed for such purpose, in order to make provision for the charge of any loan or loans thereafter to be contracted.”
It was further resolved, that in order to carry into effect the provisions of the acts of the 32d and 42d of the King, for redeeming every part of the national debt within the period of forty-five years from the time of its creation, it is expedient that in future, whenever the amount of the sum to be raised by loan, or by any other addition to the public funded debt, shall in any year exceed the sum estimated to be applicable in the same year to the reduction of the public debt, an annual sum equal to one half of the interest of the excess of the said loan, or other addition, beyond the sum so estimated to be applicable, shall be set apart out of the monies composing the consolidated fund of Great Britain, and shall be issued at the receipt of the exchequer to the Governor and Company of the Bank of England, to be by them placed to the account of the commissioners for the reduction of the national debt;∗ and upon the remainder of such loan or other addition, the annual sum of 1 per cent. on the capital thereof, according to the provisions of the said act.
A provision was also made, for the first time, for 1 per cent. sinking fund on the unfunded debt then existing, or which might thereafter be contracted.
In 1802, it has been already observed, it was deemed expedient that no provision should be made for a sinking fund of 1 per cent. on a capital of 86,796,300l.; and as it was considered by the proposer of the new regulation in 1813, that he was reverting to the principle of Mr Pitt's act of 1792, he provided that 867,963l. should be added to the sinking fund for the 1 per cent. on the capital stock created, and which was omitted to be provided for in 1802.†
This was the substance of Mr Vansittart's new plan, and which, he contended, was not injurious to the stockholder, as it strictly conformed to the spirit of Mr Pitt's act of 1792.
1st, By Mr Pitt's act, no relief could be afforded to the public from the burdens of taxation, till the stock redeemed by the original sinking fund of 1 million amounted to such a sum as that the dividends on the capital stock redeemed should amount to 3 millions, making the whole sinking fund 4 millions; from thenceforth the 4 millions were to discharge debt as before, but the interest of debt so discharged was to be available for the public service, and the public was not to be relieved from the charge on the remainder of the debt of 238 millions till the 4 millions at simple interest, and the further sinking fund which might arise from the falling in of terminable annuities, together with the additional sum of 200,000l. per annum, voted in 1792, with their accumulations, had redeemed the capital of 238 millions. The sinking fund arising from the 1 per cent. on each loan was directed, by the act of 1792, to be applied to each separate loan for which it was raised. Mr Vansittart thought himself justified, and free from any breach of faith to the stockholder, in taking for the public service, not the interest of 4 millions, which is all that Mr Pitt's bill would allow him to take, but the interest on 238 millions; and on what plea? because the whole consolidated sinking funds, comprising the 1 per cent. on every loan raised since 1793, had purchased 238 millions of stock. On Mr Pitt's plan he might have taken 20,000l. per annum from the sinking fund; on his own construction of that act, he took from it more than 7 millions per annum.
2dly, Mr Vansittart acknowledged that the stockholder, in 1802, was deprived of the advantage of 1 per cent. sinking fund on a capital of 86,796,300l.; and therefore, to be very just, he gives in 1813 1 per cent. on that capital; but should he not have added the accumulation which would have been made in the eleven years from 1802 to 1813, on 867,963l., at compound interest, and which would have given a further addition to the sinking fund of more than 360,000l. per annum?
3dly, On Mr Pitt's plan, every loan was to be redeemed by its sinking fund, under the most unfavourable circumstances, in forty-five years. If the loan was raised in a 3 per cent. fund at 60, and the stock was uniformly to continue at that price, a 1 per cent. sinking fund would redeem the loan to which it was attached in twenty-nine years; but then no relief would be given to the public from taxation till the end of twenty-nine years; and if there had been loans of 10 millions every year for that period, when the first loan was paid off, the second would require only one year for its final liquidation; the third two years, and so on. On Mr Vansittart's plan, under the same circumstances, the sinking fund of each and every loan was to be applied, in the first instance, to the redemption of the first loan; and when that was redeemed and cancelled, the whole of the sinking funds were to be applied to the payment of the second, and so on successively. The first loan of 10 millions would be cancelled in less than thirteen years, the second in less than six years after the first, the third in a less time, and so on. At the end of the thirteenth year, the public would be relieved from the interest on the first loan, or, which is the same thing, from the necessity of finding fresh taxes for a new loan at the end of thirteen years, for two new loans at the end of nineteen years; but what would be the state of its debt at either of these periods, or at the end of twenty-nine years? Could this advantage be obtained without a corresponding disadvantage? No: the excess of debt on Mr Vansittart's plan would be exactly equal to these various sums, thus prematurely released by cancelled stock, accumulated at compound interest. How could it be otherwise? Is it possible that we could obtain a present relief from the charge of debt without either directly or indirectly borrowing the fund necessary to provide that relief at compound interest? “By this means,” says Mr Vansittart, “the loan first contracted would be discharged at an earlier period, and the funds charged with the payment of its interest would become applicable to the public service. Thus, in the event of a long war, a considerable resource might accrue during the course of the war itself, as every successive loan would contribute to accelerate the redemption of those previously existing; and the total amount of charge to be borne by the public, in respect of the public debt, would be reduced to a narrower compass than in the other mode, in which a greater number of loans would be co-existing. At the same time the ultimate discharge of the whole debt would be rather accelerated than retarded.”—“It is now only necessary to declare that an amount of stock equal to the whole of the debt existing in 1786 has been redeemed; and that, in like manner, whenever an amount of stock equal to the capital and charge of any loan raised since 1792 shall be redeemed, in its proper order of succession, such loan shall be deemed and taken to be redeemed and satisfied. Every part of the system will then fall at once into its proper place; and we shall proceed with the future redemption with all the advantages which would have been derived from the original adoption of the mode of successive instead of simultaneous redemption. Instead of waiting till the purchase of the whole of the debt consolidated in 1802 shall be completed, that part of it which existed previously to 1792 will be considered as already redeemed, and the subsequent loans will follow in succession, whenever equal portions of stock shall have been purchased. It is satisfactory to observe, that by a gradual and equal progress, we shall have the power of effecting the complete repayment of the debt more speedily than by the present course.” Is it possible that Mr Vansittart could so deceive himself as to believe that, by taking 5 millions from the sinking fund, which would not have been taken by the provisions of the act of 1802, which would not have been taken by the act of 1792, and other sums successively, in shorter times than could have been effected by the provisions of those two acts, he would be enabled to complete the repayment of the debt more speedily? Is it possible that he could believe that, by diminishing the sinking fund, that is, the amount of revenue as compared with expenditure, he would effect the payment of our debt more speedily? It is impossible to believe this. How, then, are his words to be accounted for? In one way he might have a meaning. It might be this,—I know we shall be more in debt in ten, twenty, and thirty years, on my plan, than we should have been on that of Lord Sidmouth or on that of Mr Pitt; but we shall have effected a greater payment in that time of the stock now existing, as the sinking funds attached to future loans will be employed in paying our present debt. On Mr Pitt's plan, those sinking funds would be used for the payment of the new debt to be created; that is to say, of the loans to which they are respectively attached. We shall be more in debt at every subsequent period, it is true; but as our debt may be divided into old stock and new stock, I am correct when I say that we shall have the power of completing the repayment of the debt, meaning by the debt the stock now existing, sooner than by the present course.
This plan of Mr Vansittart was opposed with great ability, both by Mr Huskisson and Mr Tierney. The former gentleman said, “The very foundation of the assumption that the old debt has been paid off, is laid in the circumstance of our having incurred a new debt of a much larger amount; and even allowing that assumption, Mr Vansittart would not have been able to erect his present scheme upon it, if the credit of the country had not been, for the last twenty years, materially impaired by the pressure of that new debt. On the one hand, had the sinking fund been operating at 3 per cent. during that period, he would not have touched it, even under his own construction of the act of 1792. On the other hand, had the price of the stocks been still lower than it has been, he would have taken from that sinking fund still more largely than he is now, according to his own rule, enabled to take. This, then, is the new doctrine of the sinking fund;—that, having been originally established ‘to prevent the inconvenient and dangerous accumulation of debt hereafter’ (to borrow the very words of the act), and for the support and improvement of public credit, it is in the accumulation of new debt that Mr Vansittart found at once the means and the pretence for invading that sinking fund; and the degree of depression of public credit was, with him, the measure of the extent to which that invasion might be carried. And this is the system of which it is gravely predicated that it is no departure from the letter, and no violation of the spirit, of the act of 1792; and of which we are desired seriously to believe, that it is only the following up and improving upon the original measure of Mr Pitt!—of which measure the clear and governing intention was, that every future loan should, from the moment of its creation, carry with it the seeds of its destruction; and that the course of its reimbursement should that moment be placed beyond the discretion and control of Parliament.”—(Mr Huskisson's Speech, 25th March 1813.)
This is the last alteration that has taken place in the machinery of the sinking fund. Inroads more fatal than this which we have just recorded have been made on the fund itself; but they have been made silently and indirectly, while the machinery has been left unaltered.
It has been shown by Dr Hamilton, that no fund can be efficient for the reduction of debt but such as arises from an excess of revenue above expenditure.
Suppose a country at peace, and its expenditure, including the interest of its debt, to be 40 millions, its revenue to be 41 millions, it would possess 1 million of sinking fund. This million would accumulate at compound interest, for stock would be purchased with it in the market, and placed in the names of the Commissioners for paying off the debt. These Commissioners would be entitled to the dividends before received by private stockholders, which would be added to the capital of the sinking fund. The fund thus increased would make additional purchases the following year, and would be entitled to a larger amount of dividends, and thus would go on accumulating, till in time the whole debt would be discharged.
Suppose such a country to increase its expenditure 1 million, without adding to its taxes, and to keep up the machinery of the sinking fund, it is evident that it would make no progress in the reduction of its debt; for though it would accumulate a fund in the same manner as before, in the hands of the Commissioners, it would, by means of adding to its funded or unfunded debt, and by constantly borrowing, in the same way, the sum necessary to pay the interest on such loans, accumulate its million of debt annually at compound interest, in the same manner as it accumulated its million annually of sinking fund.
But suppose that it continued its operations of investing the sinking fund in the purchase of stock, and made a loan for the million which it was deficient in its expenditure, and that, in order to defray the interest and sinking fund of such loan, it imposed new taxes on the people to the amount of 60,000l., the real and efficient sinking fund would, in that case, be 60,000l. per annum, and no more; for there would be 1,060,000l., and no more, to invest in the purchase of stock, while 1 million was raised by the sale of stock, or, in other words, the revenue would exceed the expenditure by 60,000l.
Suppose a war to take place, and the expenditure to be increased to 60 millions, while its revenue continued, as before, 41 millions, still keeping on the operation of the Commissioners with respect to the investment of 1 million. If it were to raise war-taxes for the payment of the 20 millions additional expense, the million of sinking fund would operate to the reduction of the national debt at compound interest as it did before. If it raised 20 millions by loan in the stocks or in exchequer bills, and did not provide for the interest by new taxes, but obtained it by an addition to the loan of the following year, it would be accumulating a debt of 20 millions at compound interest; and while the war lasted, and the same expenditure continued, it would not only be accumulating a debt of 20 millions at compound interest, but a debt of 20 millions per annum and consequently the real increase of its debt, after allowing for the operation of the million of sinking fund, would be at the rate of 19 millions per annum at compound interest. But if it provided by new taxes 5 per cent. interest for this annual loan of 20 millions, it would, on the one hand, simply increase the debt 20 millions per annum; on the other, it would diminish it by 1 million per annum, with its compound interest. If we suppose that, in addition to the 5 per cent. interest, it raised also by annual taxes 200,000l. per annum as a sinking fund for each loan of 20 millions, it would, the first year of the war, add 200,000l. to the sinking fund, the second year 400,000l., the third year 600,000l., and so on, 200,000l. for every loan of 20 millions. Every year it would add, by means of the additional taxes, to its annual revenue, without increasing its expenditure. Every year, too, that part of this revenue which was devoted to the purpose of purchasing debt, would increase by the amount of the dividends on the stock purchased, and thus would its revenue still further increase, till at last the revenue would overtake the expenditure, and then once again it would have an efficient sinking fund for the reduction of debt.
It is evident that the result of these operations would be the same, the rate of interest being supposed to be always at 5 per cent., or any other rate, if, during the excess of expenditure above revenue, the operation of the Commissioners in the purchase of stock were to cease. The real increase of the national debt must depend upon the excess of expenditure above revenue, and that would be noways altered by a different arrangement. Suppose that, instead of raising 20 millions the first year, and paying off 1 million, only 19 millions had been raised by loan, and the same taxes had been raised, namely, 1,200,000l. As 5 per cent, would be paid on 19 millions only, instead of on 20 millions, or 950,000l. for interest instead of 1 million, there would remain, in addition to the original million, 250,000l. towards the loan of the following year, consequently the loan of the second year would be only for 18,750,000l.; but as 1,200,000l. would be again raised by additional taxes, or 2,400,000l. in the whole the second year, besides the original million, there would be a surplus, after paying the interest of both loans, of 1,512,500l., and therefore the loan of the third year would be for 18,487,500l. The progress during five years is shown in the following table:—
If, instead of thus diminishing the loan each year, the same amount of taxes precisely had been raised, and the sinking fund had been applied in the usual manner, the amount of debt would have been exactly the same at any one of these periods. In the third column of the above table it will be seen, that in the fifth year the debt had increased to 92,371,844l. On the supposition that 200,000l. per annum had each year been added to the sinking fund, and invested in stock by the Commissioners, the amount of unredeemed debt would have been the same sum of 92,371,844l., as will be seen by the last column of the following table:—
A full consideration of this subject, in all its details, has led Dr Hamilton to the conclusion, that this first mode of raising the supplies during war, viz. by diminishing the amount of the annual loans, and stopping the purchases of the Commissioners in the market, would be more economical, and that it ought therefore to be adopted. In the first place, all the expenses of agency would be saved; in the second, the premium usually obtained by the contractor for the loan would be saved on that part of it which is repurchased by the Commissioners in the open market. It is true that the stocks may fall as well as rise between the time of contracting for the loan and the time of the purchases made by the Commissioners, and therefore, in some cases, the public may gain by the present arrangement; but as these chances are equal, and a certain advantage is given to the loan contractor, to induce him to advance his money, independently of all contingency of future price, the public now give this advantage on the larger sum instead of on the smaller. On an average of years this cannot fail to amount to a very considerable sum. But both these objections would be obviated, if the clause in the original sinking fund bill, authorising the Commissioners to subscribe to any loan for the public service, to the amount of the annual fund which they have to invest, were uniformly complied with. This is the mode which was for several years strongly urged by Mr Grenfell, and it is far preferable to that which Dr Hamilton recommends. Dr Hamilton and Mr Grenfell both agree, that in time of war, when the expenditure exceeds the revenue, and when therefore we are annually increasing our debt, it is a useless operation to buy a comparatively small quantity of stock in the market, while we are at the same time under the necessity of making large sales: but Dr Hamilton would not keep the sinking fund as a separate fund; Mr Grenfell would, and would have it increased with our debt by some known and fixed rules. We agree with Mr Grenfell. If a loan of 20 millions is to be raised annually, while there is in the hands of the Commissioners 10 millions which they annually receive, the obvious and simple operation should be really to raise only 10 millions by loan; but there is a convenience in calling it 20 millions, and allowing the Commissioners to subscribe 10 millions. All the objections of Dr Hamilton are by these means removed; there will be no expense for agency; there will be no loss on account of any difference of price at which the public sell and buy. By calling the loan 20 millions the public will be induced more easily to bear the taxes which are necessary for the interest and sinking fund of 20 millions. Call the loan only 10 millions, abolish during the war the very name of the sinking fund in all your public accounts, and it would be difficult to show to the people the expediency of providing 1,200,000l. per annum by additional taxation, for the interest of a loan of 10 millions. The sinking fund is therefore useful as an engine of taxation, and if the country could depend on ministers, that it would be faithfully devoted to the purposes for which it was established, namely, to afford at the termination of war a clear additional surplus revenue beyond expenditure, in proportion to the addition made to the debt, it would be wise and expedient to keep it as a separate fund, subject to fixed rules and regulations.
We shall presently inquire whether there can be any such dependence, and therefore whether the sinking fund is not an instrument of mischief and delusion, and really tending rather to increase our debt and burdens than to diminish them.
It is objected both to Dr Hamilton's and Mr Grenfell's projects, that the disadvantages which they mention are trifling in degree, and are more than compensated by the steadiness which is given to the market by the daily purchases of the Commissioners; that the money which those purchases throw into the market is a resource on which bankers and others, who may suddenly want money, with certainty rely.
Those who make this objection forget, that if, by the adoption of this plan, a daily purchaser is withdrawn from the market, so also is a daily seller. The minister gives now to one party 10 millions of money to invest in stock, and to another party as much stock as 10 millions costs to sell, and as the instalments on the loan are paid monthly, it may fairly be said that the supply is as regular as the demand. It cannot be doubted too, that a loan of 20 millions is negotiated on worse terms than one of 10. It is true that no more stock will remain in the market at the end of the year, whether the one or the other sum be raised by loan, but for a time the contractor must make a large purchase, and be must wait before he can make his sale of 10 millions to the Commissioners. He is induced then to sell much more largely before the contract, which cannot fail to affect the market price, and it must be recollected, that it is the market price on the day of bidding for the loan which governs the terms on which the loan is negotiated. It is looked to both by the minister who sells and the contractor who purchases. The experiment on Mr Grenfell's suggestion was tried for the first time in 1819; the sum required by Government was 24 millions, to which the Commissioners subscribed 12 millions. In lieu of a loan of 24 millions from the contractor, there was one only of 12 millions, and as soon as this arrangement was known, previous to the contract, the stocks rose to 4 or 5 per cent., and influenced the terms of the loan in that degree. The reason was, that a preparation had been made for 24 or 30 millions loan, and as soon as it was known that it would be for 12 millions only a part of the stock sold was repurchased. Another advantage attending the smaller loan is, that 800l. per million, which is paid to the Bank for management of the loan, is saved on the sum subscribed by the Commissioners.
Dr Hamilton, in another part of his work, observes, “If the sinking fund could be conducted without loss to the public, or even if it were attended with a moderate loss, it would not be wise to propose an alteration of a system which has gained the confidence of the public, and which points out a rule of taxation that has the advantage at least of being steady. If that rule be laid aside, our measures of taxation might become entirely loose.”
“The means, and the only means, of restraining the progress of national debt, are saving of expenditure and increase of revenue. Neither of these has a necessary connexion with a sinking fund. But if they have an eventual connexion, and if the nation, impressed with a conviction of the importance of a system established by a popular minister has, in order to adhere to it, adopted measures either of frugality in expenditure, or exertion in raising taxes, which it would not otherwise have done, the sinking fund ought not to be considered as inefficient, and its effects may be of great importance.”
It will not, we think, admit of a doubt, that if Mr Pitt's sinking fund, as established in 1792, had been always fairly acted upon—if, for every loan, in addition to the war-taxes, the interest, and a 1 per cent. sinking fund had been invariably supplied by annual taxes—we should have made rapid progress in the extinction of debt. The alteration in principle which was made in the sinking fund by the act of 1802 was, in our opinion, a judicious one: it provided that no part of the sinking fund, neither that which arose from the original million, with its addition of 200,000l. per annum, nor that which arose from the 1 per cent. raised for the loans since 1792, should be applicable to the public service till the whole of the debt then existing was redeemed. We should have been disposed to extend this principle further, and to make a provision, that no part of the sinking fund should be applicable to the public service until the whole of the debt then existing, and subsequently to be created, should be redeemed. We do not think that there is much weight in the objection to this clause, which was made to it by Lord Henry Petty in 1807, and referred to and more strongly urged by Mr Vansittart in 1813. The noble Lord said, “I need hardly press upon the consideration of the committee all the evils likely to result from allowing the sinking fund to accumulate without any limit, for the nation would be exposed by that accumulation to the mischief of having a large portion of capital taken at once out of the market, without any adequate means of applying it, which would of course be deprived of its value.
“This evil must appear so serious to any man who contemplates its character, that I have no doubt it will be felt, however paradoxical it may seem, that the redemption of the whole national debt at once would be productive of something like national bankruptcy; for the capital would be equivalent almost to nothing, while the interest he had before derived from it would be altogether extinguished. The other evils which would arise from, and which must serve to demonstrate the mischievous consequence of a prompt discharge of the national debt, I will show presently. Different arrangements were adopted in the further provisions made on the subject of the sinking fund in 1792 and in 1802. By the first the sinking fund of 1 per cent., which was thenceforward to be provided for every new loan, was made to accumulate at compound interest, until the whole of the debt created by such new loan should be extinguished. And by the second arrangement, all the various sinking funds existing in 1802 were consolidated, and the whole were appropriated to accumulate at compound interest until the discharge of the whole of the debt also existing in 1802. But the debt created since 1802, amounting to about 100 millions of nominal capital, is still left subject to the act of 1792, which provides for each separate loan a sinking fund of only 1 per cent. on the nominal capital. The plan of 1802, engrafted on the former acts of 1786 and 1792, provided for the still more speedy extinction of the debt to which it applied; but it would postpone all relief from the public burdens to a very distant period (computed in 1802 to be from 1834 to 1844); and it would throw such large and disproportionate sums into the money market in the latter years of its operation, as might produce a very dangerous depreciation of the value of money. Many inconveniences might also arise from the sudden stop which would be put to the application of those sums when the whole debt should have been redeemed, and from the no less sudden change in the price of all commodities, which must follow from taking off at one and the same moment taxes to an extent probably then much exceeding 30 millions. The fate of merchants, manufacturers, mechanics, and every description of dealers, in such an event, must be contemplated by every thinking man with alarm; and this applies to my observation respecting a national bankruptey; for, should the national debt be discharged, and such a weight of taxation taken off at once, all the goods remaining on hand would be, comparatively speaking, of no value to the holders, because, having been purchased or manufactured while such taxation prevailed, they must be undersold by all those who might manufacture the same kind of goods after such taxation had ceased. These objections were foreseen, and to a certain degree acknowledged, at the time when the act of 1802 was passed, and it was then answered, that whenever the danger approached it might be obviated by subsequent arrangements.” A great many of these objections appear to us to be chimerical, but, if well founded, we agree with the latter part of the extract, “whenever the danger approached it might be obviated by subsequent arrangements.” It was not necessary to legislate in 1807 or in 1813 for a danger which could not happen till between 1834 and 1844. It was not necessary to provide against the evils which would arise from a plethora of wealth at a remote period, when our real difficulty was how to supply our immediate and pressing wants.
What are the evils apprehended from the extravagant growth of the sinking fund towards the latter years of its existence? Not that taxation will be increased, because the growth of the sinking fund is occasioned by dividends on stock purchased, but, first, that capital will be returned too suddenly into the hands of the stockholder, without his having any means of deriving a revenue from it; and, secondly, that the remission of taxes, to the amount probably of 30 millions, will have a great effect on the prices of particular commodities, and will be very pernicious to the interest of those who may deal in or manufacture such commodities.
It is obvious that the Commissioners have no capital. They receive quarterly or daily certain sums, arising from the taxes, which they employ in the redemption of debt. One portion of the people pay what another portion receive. If the payers employed the sums paid as capital, that is to say, in the production of raw produce, or manufactured commodities, and the receivers, when they received it, employed it in the same manner, there would be little variation in the annual produce. A part of that produce might be produced by A instead of by B: not that even this is a necessary consequence; for A, when he received the money for his debt, might lend it to B, and might receive from him a portion of the produce for interest, in which case B would continue to employ the capital as before. On the supposition, then, that the sinking fund is furnished by capital and not by revenue, no injury would result to the community, however large that fund might be; there might or might not be a transfer of employments, but the annual produce, the real wealth of the country, would undergo no deterioration, and the actual amount of capital employed would neither be increased nor diminished. But if the payers of taxes, for the interest and sinking fund of the national debt, paid them from revenue, then they would retain the same capital as before in active employment; and as this revenue, when received by the stockholder, would be by him employed as capital, there would be, in consequence of this operation, a great increase of capital; every year an additional portion of revenue would be turned into capital, which could be employed only in furnishing new commodities to the market. Now, the doubts of those who speak of the mischievous effects of the great accumulation of the sinking fund, proceed from an opinion they entertain, that a country may possess more capital than it can beneficially employ, and that there may be such a glut of commodities that it would be impossible to dispose of them on such terms as to secure to the producers any profits on their capitals. The error of this reasoning has been made manifest by M. Say, in his able work, Economic Politique, and afterwards by Mr Mill, in his excellent reply to Mr Spence, the advocate of the doctrine of the Economistes. They show that demand is only limited by production; whoever can produce has a right to consume, and he will exercise his privilege to the greatest extent. They do not deny that the demand for particular commodities is limited, and therefore they say there may be a glut of such commodities; but in a great and civilized country, wants, either for objects of necessity or of luxury, are unlimited, and the employment of capital is of equal extent with our ability of supplying food and necessaries for the increasing population, which a continually augmenting capital would employ. With every increased difficulty of producing additional supplies of raw produce from the land, corn, and other necessaries of the labourer, would rise; hence wages would rise. A real rise of wages is necessarily followed by a real fall of profits, and therefore when the land of a country is brought to the highest state of cultivation, when more labour employed upon it will not yield in return more food than what is necessary to support the labourer so employed, that country is come to the limit of its increase both of capital and population.
The richest country in Europe is yet far distant from that degree of improvement; but if any had arrived at it, by the aid of foreign commerce, even such a country could go on for an indefinite time increasing in wealth and population; for the only obstacle to this increase would be the scarcity, and consequent high value, of food and other raw produce. Let these be supplied from abroad in exchange for manufactured goods, and it is difficult to say where the limit is at which you would cease to accumulate wealth, and to derive profit from its employment. This is a question of the utmost importance in political economy. We hope that the little we have said on the subject will be sufficient to induce those who wish clearly to understand the principle, to consult the works of the able authors whom we have named, to which we acknowledge ourselves so much indebted. If these views are correct, there is then no danger that the accumulated capital which a sinking fund under particular circumstances might occasion, would not find employment, or that the commodities which it might be made to produce would not be beneficially sold, so as to afford an adequate profit to the producers. On this part of the subject it is only necessary to add, that there would be no necessity for stock-holders to become farmers or manufacturers. There is always to be found in a great country a sufficient number of responsible persons, with the requisite skill, ready to employ the accumulated capital of others, and to pay to them a share of the profits, and which in all countries is known by the name of interest for borrowed money.
The second objection to the indefinite increase of the sinking fund remains now to be noticed. By the remission of taxes suddenly to the amount probably of 30 millions per annum, a great effect would be produced on the price of goods. “The fate of merchants, manufacturers, mechanics, and every description of dealers, in such an event, must be contemplated by every thinking man with alarm; for should the national debt be discharged, and such a weight of taxation taken off at once, all the goods remaining on hand would be, comparatively speaking, of no value to the holders, because, having been purchased or manufactured while such taxation prevailed, they must be undersold by all those who might manufacture the same kind of goods after such taxation had ceased.” It is only, then, on the supposition that merchants, manufactures, and dealers, would be affected as above described, that any evil would result from the largest remission of taxes. It would not of course be said, that by remitting a tax of 5l. to A, 10l. to B, 100l. to C, and so on, any injury would be done to them. If they added these different sums to their respective capitals, they would augment their permanent annual revenue, and would be contributing to the increase of the mass of commodities, thereby adding to the general abundance. We have already, we hope, successfully, shown that an augmentation of capital is neither injurious to the individual by whom it is saved, nor to the community at large; its tendency is to increase the demand for labour, and consequently the population, and to add to the power and strength of the country. But they will not add these respective sums to their capitals; they will expend them as revenue! The measure cannot be said to be either injurious to themselves or to the community on that account. They annually contributed a portion of their produce to the stockholder in payment of debt, who immediately employed it as capital; that portion of produce is now at their own disposal; they may consume it themselves if they please. A farmer who used to sell a portion of his corn for the particular purpose of furnishing this tax, may consume this corn himself; he may get the distiller to make gin of it, or the brewer to turn it into beer, or he may exchange it for a portion of the cloth which the clothier, who is now released from the tax as well as the farmer, is at liberty to dispose of for any commodity which he may desire. It may indeed be said, where is all this cloth, beer, gin, &c., to come from; there was no more than necessary for the general demand before this remission of taxes; if every man is now to consume more, from whence is this supply to be obtained? This is an objection of quite an opposite nature to that which was before urged. Now, it is said there would be too much demand and no additional supply; before, it was contended that the supply would be so great that no demand would exist for the quantity supplied. One objection is no better founded than the other. The stockholders, by previously receiving the payment of their debt, and employing the funds they received productively, or lending them to some other persons who would so employ them, would produce the very additional commodities which the society at large would have it in their power to consume. There would be a general augmentation of revenue, and a general augmentation of enjoyment; and it must not for a moment be supposed that the increased consumption of one part of the people would be at the expense of another part. The good would be unmixed, and without alloy. It remains, then, only to consider the injury to traders from the fall in the price of goods; and the remedy against this appears to be so very simple, that it surprises us that it should ever have been urged as an objection. In laying on a new tax, the stock in hand of the article taxed is commonly ascertained; and, as a measure of justice, the dealer in such article is required to pay the imposed tax on his stock. Why may not the reverse of this be done? Why may not the tax be returned to each individual on his stock in hand, whenever it shall be thought expedient to take off the tax from the article which he manufactures, or in which he deals? It would only be necessary to continue the taxes for a very short time for this purpose. On no view of this question can we see any validity in the arguments which we have quoted, and which were so particularly insisted on by Mr Vansittart.
There are some persons who think that a sinking fund, even when strictly applied to its object, is of no national benefit whatever. The money which is contributed, they say, would be more productively employed by the payers of the taxes than by the commissioners of the sinking fund. The latter purchase stock with it, which probably does not yield 5 per cent.; the former would obtain from the employment of the same capital much more than 5 per cent., consequently the country would be enriched by the difference. There would be in the latter case a larger nett supply of the produce of our land and labour, and that is the fund from which ultimately all our expenditure must be drawn. Those who maintain this opinion do not see that the commissioners merely receive money from one class of the community, and pay it to another class, and that the real question is, Which of these two classes will employ it most productively? Forty millions per annum are raised by taxes, of which 20 millions, we will suppose, is paid for sinking fund, and 20 millions for interest of debt. After a year's purchase is made by the commissioners, this 40 millions will be divided differently; 19 millions will be paid for interest, and 21 millions for sinking fund; and so from year to year, though 40 millions is always paid on the whole, a less and less portion of it will be paid for interest, and a larger portion for sinking fund, till the commissioners have purchased the whole amount of stock, and then the whole 40 millions will be in the hands of the commissioners. The sole question, then, with regard to profit is, whether those who pay this 40 millions, or those who receive it, will employ it most productively; the commissioners, in fact, never employing it all, their business being to transfer it to those who will employ it. Now, of this we are quite certain, that all the money received by the stockholder in return for his stock must be employed as capital; for if it were not so employed, he would be deprived of his revenue, on which he had habitually depended. If, then, the taxes which are paid towards the sinking fund be derived from the revenue of the country, and not from its capital, by this operation a portion of revenue is yearly realised into capital, and consequently the whole revenue of the society is increased; but it might have been realised into capital by the payer of the tax if there had been no sinking fund, and he had been allowed to retain the money to his own use. It might so, and if it had been so disposed of, there can be no advantage in respect to the accumulation of the wealth of the whole society by the establishment of the sinking fund; but it is not so probable that the payer of the tax would make this use of it as the receiver. The receiver, when he gets paid for his stock, only substitutes one capital for another; and he is accustomed to look to his capital for all his yearly income. The payer will have all that he paid in addition to his former revenue; if the sinking fund be discontinued he may indeed realise it into capital, but he may also use it as revenue, increasing his expenditure on wine, houses, horses, clothes, &c. The payer might, too, have paid it from his capital; and therefore the employment of one capital might be substituted for another. In this case, too, no advantage arises from the sinking fund, as the national wealth would accumulate as rapidly without it as with it; but if any portion of the taxes paid expressly for the sinking fund be paid from revenue, and which, if not so paid, would have been expended as revenue, then there is a manifest advantage in the sinking fund, as it tends to increase the annual produce of our land and labour; and as we cannot but think that this would be its operation, we are clearly of opinion that a sinking fund, honestly applied, is favourable to the accumulation of wealth.
Dr Hamilton has followed Dr Price in insisting much on the disadvantage of raising loans during war in a 3 per cent. stock, and not in a 5 per cent. stock. In the former, a great addition is made to the nominal capital, which is generally redeemed during peace at a greatly advanced price. Three per cents. which were sold at 60 will probably be repurchased at 80, and may come to be bought at 100; whereas in 5 per cents. there would be little or no increase of nominal capital, and as all the stocks are redeemable at par, they would be paid off with very little loss. The correctness of this observation must depend on the relative prices of these two stocks. During the war in 1798, the 3 per cents. were at 50, while the 5 per cents. were at 73; and at all times the 5 per cents. bear a very low relative price to the 3 per cents. Here, then, is one disadvantage to be put against another, and it must depend upon the degree in which the prices of the 3 per cents. and 5 per cents. differ, whether it be more desirable to raise the loan in the one or in the other. We have little doubt, that during many periods of the war, there would have been a decided disadvantage in making the loan in 5 per cent. stock in preference to 3 per cent. stock. The market in 5 per cent. stock, too, is limited; a sale cannot be forced in it without causing a considerable fall, a circumstance known to the contractors, and against which they would naturally take some security in the price which they bid for a large loan if in that stock. A premium of 2 per cent. on the market price may appear to them sufficient to compensate them for their risk in a loan in 3 per cent. stock; they may require one of 5 per cent. to protect them against the dangers they apprehend from taking the same loan in a 5 per cent. stock.
II. After having duly considered the operation of a sinking fund derived from annual taxes, we come now to the consideration of the best mode of providing for our annual expenditure, both in war and peace; and further, to examine whether a country can have any security that a fund raised for the purpose of paying debt will not be misapplied by ministers, and be really made the instrument for creating new debt, so as never to afford a rational hope that any progress whatever will permanently be made in the reduction of debt.
Suppose a country to be free from debt, and a war to take place which should involve it in an annual additional expenditure of 20 millions—there are three modes by which this expenditure may be provided; first, taxes may be raised to the amount of 20 millions per annum, from which the country would be totally freed on the return of peace; or, secondly, the money might be annually borrowed and funded, in which case, if the interest agreed upon was 5 per cent., a perpetual charge of 1 million per annum taxes would be incurred for the first year's expense, from which there would be no relief during peace, or in any future war,—of an additional million for the second year's expense, and so on for every year that the war might last. At the end of twenty years, if the war lasted so long, the country would be perpetually encumbered with taxes of 20 millions per annum, and would have to repeat the same course on the recurrence of any new war. The third mode of providing for the expenses of the war would be to borrow annually the 20 millions required as before, but to provide by taxes a fund, in addition to the interest, which, accumulating at compound interest, should finally be equal to the debt. In the case supposed, if money was raised at 5 per cent., and a sum of 200,000l. per annum in addition to the million for interest were provided, it would accumulate to 20 millions in forty-five years; and by consenting to raise 1,200,000l. per annum by taxes for every loan of 20 millions, each loan would be paid off in forty-five years from the time of its creation; and in forty-five years from the termination of the war, if no new debt were created, the whole would be redeemed, and the whole of the taxes would be repealed.
Of these three modes we are decidedly of opinion that the preference should be given to the first. The burdens of the war are undoubtedly great during its continuance, but at its termination they cease altogether. When the pressure of the war is felt at once, without mitigation, we shall be less disposed wantonly to engage in an expensive contest, and if engaged in it, we shall be sooner disposed to get out of it, unless it be a contest for some great national interest. In point of economy there is no real difference in either of the modes, for 20 millions in one payment, 1 million per annum for ever, or 1,200,000l. for forty-five years, are precisely of the same value; but the people who pay the taxes never so estimate them, and therefore do not manage their private affairs accordingly. We are too apt to think that the war is burdensome only in proportion to what we are at the moment called to pay for it in taxes, without reflecting on the probable duration of such taxes. It would be difficult to convince a man possessed of 20,000l., or any other sum, that a perpetual payment of 50l. per annum was equally burdensome with a single tax of 1000l. He would have some vague notion that the 50l. per annum would be paid by posterity, and would not be paid by him; but if he leaves his fortune to his son, and leaves it charged with this perpetual tax, where is the difference whether he leaves him 20,000l. with the tax, or 19,000l. without it? This argument of charging posterity with the interest of our debt, or of relieving them from a portion of such interest, is often used by otherwise well informed people, but we confess we see no weight in it. It may indeed be said that the wealth of the country may increase, and as a portion of the increased wealth will have to contribute to the taxes, the proportion falling on the present amount of wealth will be less, and thus posterity will contribute to our present expenditure. That this may be so is true, but it may also be otherwise; the wealth of the country may diminish, individuals may withdraw from a country heavily taxed, and therefore the property retained in the country may pay more than the just equivalent which would at the present time be received from it. That an annual tax of 50l. is not deemed the same in amount as 1000l. ready money, must have been observed by every body. If an individual were called upon to pay 1000l. to the income-tax, he would probably endeavour to save the whole of it from his income; he would do no more if, in lieu of this war-tax, a loan had been raised, for the interest of which he would have been called upon to pay only 50l. income-tax. The war-taxes, then, are more economical, for when they are paid an effort is made to save to the amount of the whole expenditure of the war, leaving the national capital undiminished. In the other case, an effort is only made to save to the amount of the interest of such expenditure, and therefore the national capital is diminished in amount. The usual objection made to the payment of the larger tax is, that it could not be conveniently paid by manufacturers and landholders, for they have not large sums of money at their command. We think that great efforts would be made to save the tax out of their income, in which case they could obtain the money from this source; but suppose they could not, what should hinder them from selling a part of their property for money, or of borrowing it at interest? That there are persons disposed to lend is evident from the facility with which Government raises its loans. Withdraw this great borrower from the market, and private borrowers would be readily accommodated. By wise regulations and good laws the greatest facilities and security might be afforded to individuals in such transactions. In the case of a loan A advances the money, and B pays the interest, and every thing else remains as before. In the case of war-taxes A would still advance the money and B pay the interest, only with this difference, he would pay it directly to A; now he pays it to Government, and Government pays it to A.
These large taxes, it may be said, must fall on property, which the smaller taxes now do not exclusively do. Those who are in professions, as well as those who live from salaries and wages, and who now contribute annually to the taxes, could not make a large ready money payment, and they would therefore be benefited at the expense of the capitalist and landholder. We believe that they would be very little, if at all benefited by the system of war-taxes. Fees to professional men, salaries, and wages, are regulated by the prices of commodities, and by the relative situation of those who pay and of those who receive them. A tax of the nature proposed, if it did not disturb prices, would, however, change the relation between these classes, and a new arrangement of fees, salaries, and wages would take place, so that the usual level would be restored.
The reward that is paid to professors, &c., is regulated, like every thing else, by demand and supply. What produces the supply of men, with certain qualifications, is not any particular sum of money, but a certain relative position in society. If you diminish, by additional taxes, the incomes of landlords and capitalists, leaving the pay of professions the same, the relative position of professions would be raised—an additional number of persons would therefore be enticed into those lines, and the competition would reduce the pay.
The greatest advantage that would attend war-taxes would be the little permanent derangement that they would cause to the industry of the country. The prices of our commodities would not be disturbed by taxation, or if they were, they would only be so during a period when every thing is disturbed by other causes during war. At the commencement of peace every thing would be at its natural price again, and no inducement would be afforded to us by the direct effect, and still less by the indirect effect of taxes on various commodities, to desert employments in which we have peculiar skill and facilities, and engage in others in which the same skill and facilities are wanting. In a state of freedom every man naturally engages himself in that employment for which he is best fitted, and the greatest abundance of products is the result. An injudicious tax may induce us to import what we should otherwise have produced at home, or to export what we should otherwise have received from abroad; and in both cases we shall receive, besides the inconvenience of paying the tax, a less return for a given quantity of our labour than what that labour would, if unfettered, have produced. Under a complicated system of taxation it is impossible for the wisest legislature to discover all the effects, direct and indirect, of its taxes; and if it cannot do this, the industry of the country will not be exerted to the greatest advantage. By war-taxes we should save many millions in the collection of taxes. We might get rid of at least some of the expensive establishments, and the army of officers which they employ would be dispensed with. There would be no charges for the management of debt. Loans would not be raised at the rate of 50l. or 60l. for a nominal capital of 100l., to be repaid at 70l., 80l., or possibly at 100l.; and, perhaps, what is of more importance than all these together, we might get rid of those great sources of the demoralization of the people, the Customs and Excise. In every view of this question we come to the same conclusion, that it would be a great improvement in our system for ever to get rid of the practice of funding. Let us meet our difficulties as they arise, and keep our estates free from permanent encumbrances, of the weight of which we are never truly sensible till we are involved in them past remedy.
We are now to compare the other two modes of defraying the expenses of a war, one by borrowing the capital expended, and providing annual taxes permanently for the payment of the interest; the other by borrowing the capital expended, and, besides providing the interest by annual taxes, raising by the same mode, an additional revenue (and which is called the sinking fund), with a view, within a certain determinate time, to redeem the original debt, and get rid entirely of the taxes.
Under the firm conviction that nations will at last adopt the plan of defraying their expenses, ordinary and extraordinary, at the time they are incurred, we are favourable to every plan which shall soonest redeem us from debt; but then we must be convinced that the plan is effective for the object. This, then, is the place to examine whether we have or can have any security for the due application of the sinking fund to the payment of debt.
When Mr Pitt, in 1786, established the sinking fund, he was aware of the danger of entrusting it to ministers and Parliament; and therefore provided that the sums applicable to the sinking fund should be paid by the Exchequer into the hands of commissioners, by quarterly payments, who should be required to invest equal sums of money in the purchase of stock, on four days in each week, or about fifty days in each quarter. The commissioners named were, the Speaker of the House of Commons, the Chancellor of the Exchequer, the Master of the Rolls, the Accountant-General of the Court of Chancery, and the Governor and Deputy-Governor of the Bank. He thought that, under such management, there could be no misapplication of the funds, and he thought correctly, for the commissioners have faithfully fulfilled the trust reposed in them. In proposing the establishment of a sinking fund to Parliament in 1786, Mr Pitt said, “With regard to preserving the fund to be invariably applied to the diminution of the debt inalienable, it was the essence of his plan to keep that sacred, and most effectually so in time of war. He must contend, that to suffer the fund at any time, or on any pretence, to be diverted from its proper object, would be to ruin, defeat, and overturn his plan. He hoped, therefore, when the bill he should introduce should pass into a law, that house would hold itself solemnly pledged not to listen to a proposal for its repeal on any pretence whatever.”
“If this million, to be so applied, is laid out with its growing interest, it will amount to a very great sum in a period that is not very long in the life of an individual, and but an hour in the existence of a great nation; and this will diminish the debt of this country so much as to prevent the exigencies of war from raising it to the enormous height it has hitherto done. In the period of twenty-eight years, the sum of a million, annually improved, would amount to 4 millions per annum; but care must be taken that this fund be not broken in upon: this has hitherto been the bane of this country: for if the original sinking fund had been properly preserved, it is easy to be proved that our debts, at this moment, would not have been very burdensome: this has hitherto been in vain endeavoured to be prevented by acts of Parliament: the minister has uniformly, when it suited his convenience, gotten hold of this sum, which ought to have been regarded as most sacred. What, then, is the way of preventing this? The plan I mean to propose is this, that this sum be vested in certain commissioners, to be by them applied quarterly to buy up stock; by this means, no sum so great will ever be ready to be seized upon on any occasion, and the fund will go on without interruption. Long and very long has this country struggled under its heavy load, without any prospect of being relieved; but it may now look forward to an object upon which the existence of this country depends; it is therefore proper it should be fortified as much as possible against alienation. By this manner of paying 250,000l. quarterly into the hands of commissioners, it would make it impossible to take it by stealth; and the advantage would be too well felt ever to suffer a public act for that purpose. A minister could not have the confidence to come to this house and desire the repeal of so beneficial a law, which tended so directly to relieve the people from burden.”
Mr Pitt flattered himself most strangely, that he had found a remedy for the difficulty which “had hitherto been the bane of this country:” he thought he had discovered means for preventing “ministers, when it suited their convenience, from getting hold of this sum, which ought to be regarded as most sacred.” With the knowledge of Parliament which he had, it is surprising that he should have relied so firmly on the resistance which the House of Commons would offer to any plan of ministers for violating the sinking fund. Ministers have never desired the partial repeal of this law, without obtaining a ready compliance from Parliament.
We have already shown, that in 1807, one Chancellor of the Exchequer proposed to relieve the country from taxation, with a very slight exception, for several years together, while we were, during war, keeping up, if not increasing, our expenditure, and supplying it by means of annual loans. What is this but disposing of a fund which ought to have been regarded as most sacred?
In 1809 another Chancellor of the Exchequer raised a loan, without raising any additional taxes to pay the interest of it, but pledged a portion of the war-taxes for that purpose, thereby rendering an addition to that amount necessary to the loan of the following and every succeeding year. Was not this disposing of the sinking fund by stealth, and accumulating debt at compound interest? Another Chancellor of the Exchequer, in 1813, proposed a partial repeal of the law, by which 7 millions per annum of the sinking fund was placed at his disposal, and which he has employed in providing for the interest of new debt. This was done with the sanction of Parliament, and, as we apprehend, in direct violation of all the laws which had before been passed regarding the sinking fund. But what has become of the remainder of this fund, after deducting the 7 millions taken from it by the act of 1813?∗ It should now be 16 millions, and at that amount it was returned in the annual finance accounts last laid before Parliament. The finance committee appointed by the House of Commons did not fail to see that nothing can be deemed an efficient fund for the redemption of debt in time of peace, but such as arises from an excess of revenue above expenditure; and as that excess, under the most favourable view, was not quite 2 millions, they considered that sum as the real efficient sinking fund, which was now applicable to the discharge of debt. If the act of 1802 had been complied with, if the intentions of Mr Pitt had been fulfilled, we should now have had a clear excess of revenue of above 20 millions, applicable to the payment of the debt; as it is, we have 2 millions only, and if we ask ministers what has become of the remaining 18 millions, they show us an expensive peace establishment, which they have no other means of defraying but by drafts on this fund, or several hundred millions of 3 per cents., on which it is employed in discharging the interest. If ministers had not had such an amount of taxes to depend on, would they have ventured, year after year, to encounter a deficiency of revenue below expenditure, for several years together, of more than 12 millions? It is true that the measures of Mr Pitt locked it up from their immediate seizure, but they knew it was in the hands of the Commissioners, and presumed as much upon it, and justly, with the knowledge they had of Parliament, as if it had been in their own. They considered the Commissioners as their trustees, accumulating money for their benefit, and of which they knew that they might dispose whenever they should consider that the urgency of the case required it. They seem to have made a tacit agreement with the Commissioners, that they should accumulate 12 millions per annum at compound interest, while they themselves accumulated an equal amount of debt, also at compound interest. The facts are indeed no longer denied. In the last session of Parliament, for the first time, the delusion was acknowledged by ministers, after it had become manifest to every other person, but yet it is avowed to be their intention to go on with this nominal sinking fund, raising a loan every year for the difference between its real and nominal amount, and letting the Commissioners subscribe to it. On what principle this can be done it would be difficult to give any rational account. Perhaps it may be said that it would be a breach of faith to the stockholder to take away the sinking fund, but is it not equally a breach of faith if the Government itself sells to the Commissioners the greatest part of the stock which they buy? The stockholder wants something substantial and real to be done for him, and not any thing deceitful and delusive. Disguise it as you will, if of 14 millions to be invested by the Commissioners in time of peace, the stock which 12 millions will purchase is sold by the Government itself, which creates it for the very purpose of obtaining these 12 millions, and only stock for 2 millions is purchased in the market, and no taxes for sinking fund or interest are provided for the 12 millions which Government takes; the result is precisely the same to the stockholder, and to every one concerned, as if the sinking fund was reduced to 2 millions. It is utterly unworthy of a great country to countenance such pitiful shifts and evasions.
The sinking fund, then, has, instead of diminishing the debt, greatly increased it. The sinking fund has encouraged expenditure. If, during war, a country spends 20 millions per annum, in addition to its ordinary expenditure, and raises taxes only for the interest, it will in twenty years accumulate a debt of 400 millions, and its taxes will increase to 20 millions per annum. If, in addition to the million per annum, taxes of 200,000l. were raised for a sinking fund, and regularly applied to the purchase of stock, the taxes, at the end of twenty years, would be 24 millions, and its debt only 342 millions; for 58 millions will have been paid off by the sinking fund; but if at the end of this period new debt shall be contracted, and the sinking fund itself, with all its accumulations, amounting to 6,940,000l., be absorbed in the payment of interest on such debt, the whole amount of debt will be 538 millions, exceeding that which would have existed if there had been no sinking fund by 138 millions. If such an additional expenditure were necessary, provision should be made for it without any interference with the sinking fund. If, at the end of the war, there is not a clear surplus of revenue above expenditure of 6,940,000l. on the above supposition, there is no use whatever in persevering in a system which is so little adequate to its object. After all our experience, however, we are again toiling to raise a sinking fund; and in the last session of Parliament 3 millions of new taxes were voted, with the avowed object of raising the remnant of our sinking fund, now reduced to 2 millions, to 5 millions. Is it rash to prognosticate that this sinking fund will share the fate of all those which have preceded it? Probably it will accumulate for a few years, till we are engaged in some new contest, when ministers, finding it difficult to raise taxes for the interest of loans, will silently encroach on this fund; and we shall be fortunate if, in their next arrangement, we shall be able to preserve out of its wreck an amount so large as 2 millions.
It is, we think, sufficiently proved that no securities can be given by ministers that the sinking fund shall be faithfully devoted to the payment of debt, and without such securities we should be much better without such a fund. To pay off the whole, or a great portion of our debt, is, in our estimation, a most desirable object, if, at the same time, we acknowledged the evils of the funding system, and resolutely determined to carry on our future contests without having recourse to it. This cannot, or rather will not, be done by a sinking fund as at present constituted, nor by any other that we can suggest; but if, without raising any fund, the debt were paid by a tax on property, once for all it would effect its object. Its operation might be completed in two or three years during peace, and if we mean honestly to discharge the debt, we do not see any other mode of accomplishing it. The objections to this plan are the same as those which we have already attempted to answer in speaking of war-taxes. The stockholders, being paid off, would have a large mass of property, for which they would be eagerly seeking employment. Manufacturers and landholders would want large sums for their payments into the Exchequer. These two parties would not fail to make an arrangement with each other, by which one party would employ their money, and the other raise it. They might do this by loan, or by sale and purchase, as they might think it most conducive to their respective interests; with this the State would have nothing to do. Thus, by one great effort, we should get rid of one of the most terrible scourges which was ever invented to afflict a nation; and our commerce would be extended without being subject to all the vexatious delays and interruptions which our present artificial system imposes upon it.
There cannot be a greater security for the continuance of peace, than the imposing on ministers the necessity of applying to the people for taxes to support a war. Suffer this sinking fund to accumulate during peace to any considerable sum, and very little provocation would induce them to enter into a new contest. They would know that, by a little management, they could make the sinking fund available to the raising of a new supply, instead of being available to the payment of the debt. The argument is now common in the mouths of ministers, when they wish to lay on new taxes, for the purpose of creating a new sinking fund, in lieu of one which they have just spent, to say, “It will make foreign countries respect us; they will be afraid to insult or provoke us, when they know that we are possessed of so powerful a resource.” What do they mean by this argument, if the sinking fund be not considered by them as a war fund, on which they can draw in support of the contest? It cannot, at one and the same time, be employed in the annoyance of an enemy, and in the payment of debt. If taxes are, as they ought to be, raised for the expenses of a war, what facility will a sinking fund give to the raising of them? none whatever. It is not because the possession of a sinking fund will enable them to raise new and additional taxes that ministers prize it; for they know it will have no such effect; but because they know that they will be enabled to substitute the sinking fund in lieu of taxes, and employ it, as they have always done, in war, and providing interest for fresh debt. Their argument means this, or it means nothing, for a sinking fund does not necessarily add to the wealth and prosperity of a country; and it is on that wealth and prosperity that it must depend, whether new burdens can be borne by the people. What did Mr Vansittart mean in 1813, when he said that “the advantage which his new plan of finance would hereafter give, in furnishing a hundred millions in time of peace, as a fund against the return of hostilities, was one of great moment. This would place an instrument of force in the hands of Parliament, which might lead to the most important results.” “It might be objected by some, that keeping in reserve a large fund to meet the expenses of a new war, might be likely to make the Government of this country arrogant and ambitious, and therefore have a tendency unnecessarily to plunge us in new contests;” not a very unreasonable objection, we should think. How does Mr Vansittart answer it? “On this subject he would say, from long experience and observation, that it would be better for our neighbours to depend on the moderation of this country, than for this country to depend on them. He should not think the plan objectionable on this account. If the sums treasured up were misapplied by the arrogant or ambitious conduct of our Government, the blame must fall on the heads of those who misused it, not on those who put it into their hands for purposes of defence. They did their duty in furnishing the means of preserving the greatness and glory of the country, though those means might be used for the purposes of ambition, rapine, and desolation.” These are very natural observations from the mouth of a minister; but we are of opinion that such a treasure would be more safe in the custody of the people, and that Parliament have something more to do than to furnish ministers with the means of preserving the greatness and glory of the country. It is their duty to take every security that the resources of the country are not misapplied “by the arrogant and ambitious conduct of our Government,” or “used for the purposes of ambition, rapine, and desolation.”
On the extraordinary assumption that there was any thing in Mr Vansittart's plan that would more effectually than the old plan allow 100 millions hereafter to be appropriated to the public service, Dr Hamilton has the following observations:—
“We are altogether at a loss to form a distinct conception of the valuable treasure here held forth. So soon as any stock is purchased by the commissioners, and stands invested in their name, a like amount of the public debt is in fact discharged. Whether a parliamentary declaration to the effect be made or not is only a matter of form. If the money remain invested in the name of the commissioners, no doubt it may be transferred again to purchasers in the stock exchange when war broke out anew; and money may be raised for the public in this manner. It is an application to the public to invest their capital in the purchase of this dormant stock.” “It is true, that if the taxes imposed during war for the purpose of a sinking fund be continued after peace is restored, till a large sum (suppose 100,000,000l.) be vested in the hands of the Commissioners, the public, upon the renewal of the war, may spend to that amount without imposing fresh taxes,—an advantage,” observes Mr Huskisson, “not only not exclusively belonging to this plan, but unavoidable under any plan of a sinking fund in time of peace.” Mr Vansittart ought to have said, “If our sinking fund should accumulate in time of peace to so large a sum that I can take 5 millions per annum from it, I can spend 100,000,000l. in a new war without coming to you for fresh taxes; the disadvantages of my plan are, that by now taking 7,000,000l. per annum from it, and making a provision for speedily, and at regular intervals, appropriating more of this fund to present objects, the sinking fund will be so much diminished that I cannot so soon, by a great many years, avail myself of the 5 millions for the purpose which I have stated.”
[∗]Mr Huskisson's Speech on the State of the Finance and Sinking Fund, 25th March 1813.
[∗]Mr Pitt's Speech. 17th February 1792.
[∗]The effect of this clause was to give a sinking fund of 1½ instead of 1 per cent. on such excess of loan above the sinking fund if the loan were raised in a 3 per cent. stock, and of 2½ per cent. if raised in a 5 per cent. stock.
On the 3d of February 1819 the Commissioners certified that there had been transferred to them 378,519,969l. 5s. 3¾d. capital stock, the interest on which was 11,448,564l. 10s. 6¼d., and that the debt created prior to and by the 37th Geo. III. amounted to 348,684,197l. 1s. 5¾d., with a yearly interest of 11,446,736l. 3s. 4¾d.; and consequently the excess redeemed was 29,835,772l. 3s. 9¼d., with a yearly interest of 1828l. 7s. 1¼d.
[∗]Some of the following observations refer to the period when this article was originally composed.—ED.