Front Page Titles (by Subject) CHAPTER VI.: OPERATION OF A SINKING FUND ON THE PRODUCTION OF WEALTH. - The Works of Jeremy Bentham, vol. 3
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CHAPTER VI.: OPERATION OF A SINKING FUND ON THE PRODUCTION OF WEALTH. - Jeremy Bentham, The Works of Jeremy Bentham, vol. 3 
The Works of Jeremy Bentham, published under the Superintendence of his Executor, John Bowring (Edinburgh: William Tait, 1838-1843). 11 vols. Vol. 3.
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OPERATION OF A SINKING FUND ON THE PRODUCTION OF WEALTH.
The establishment of an effective and undivertible sinking fund, has been productive of effects in respect of increase of wealth, such as (to judge from any indications I have met with) had not presented themselves to those by whom the plan was adopted, or by any of those by whom it had been proposed.
Money borrowed for and applied to war expenses, is so much taken from productive capital and growing wealth. Money employed in discharge of such debt (whether by paying it off at par, or by buying it in, at an under price,) is so much given to productive capital and growing wealth.
If in a season of reimbursement, viz. peace, the space of time employed in the discharge of the debt were no longer than the space of time employed in the contracting of it, and the money employed in the reimbursement were no greater than the money borrowed, the quantity added to wealth would be equal to the quantity taken from it, bating only the loss of the interest at compound interest upon the several years’ instalments during the expenditure of it: as, if ten millions were borrowed every year for four years of war, and ten millions were paid off every year for the four succeeding years, being years of peace, there would be forty millions taken from wealth, forty millions added to wealth: but to put the nation into the same plight in respect of wealth, as if there had been no money raised for the war, it would require the interest of the first years’ ten millions for the four years, plus that of the second for the three years, plus that of the third for the two years, plus that of the fourth for one year, supposing the whole debt to be paid off at once on the first day of the year of peace; and as by the supposition it would be paid off not so, but by instalments as above, this would require a further addition on the score of the correspondent retardations.
On this supposition, it is evident that a nation could never be put by reimbursement in a plight exactly as good as what it would have been in had there been no borrowing for unproductive purposes.
But, in point of fact, a circumstance attending the borrowing system is, that the money paid and given to productive capital at the period of reimbursement, is upon the whole considerably greater than the money borrowed and spent, and taken from productive capital at the period of expenditure. When money is borrowed in three per cents. at six per cent., that is, when for every £100 borrowed of the individual, government gives him a nominal capital of £200 stock, each £100 carrying an annuity of three per cent., to discharge this annuity of £6 in the way of paying off (buying in under par being supposed out of the question,) £200 must at the time of reimbursement be put into his hands.
In the course of the late wars, greater interest than this has actually been given by the British government. If, then, the circumstance of time were laid out of the account, the consequence would be, that in so far as mere wealth were concerned, a nation with a fixed sinking fund might be—and, in a word, that Britain would be, a gainer by a war to a very considerable degree. If, for example, in the first year of a war, ten millions were borrowed on these terms, and on the first day of the second year, being a year of peace, the money borrowed were repaid at par, for which, on the above terms, twenty millions would be necessary, the gain to wealth would be ten millions, minus a year’s interest upon ten millions.
The above supposition is given only for illustration; for, as everybody knows, neither is money on the first year of a war borrowed on terms of such disadvantage, nor is it so soon repaid.
It may, however, serve to show thus much, viz. that the more disadvantageous the terms are on which money is borrowed, the greater is the restitution made to wealth.
This would not, in my view of the matter, be any recommendation of war, or borrowing for that or other purposes upon disadvantageous terms; because comfort, including security, is the immediate and only direct object in any estimate with me—and wealth only in so far as it contributes to comfort, which, without due provision made for security, it cannot do.
But in a view of the matter, which to me appears much more common than my own, this consideration should be a very important one, and should go a great way towards reconciling men to war and bad bargains.
The answer to it is, that if it be wealth—future wealth, you want, and you are willing to pay the price for it in present comfort, you have no reason to seek for it through any such disadvantageous measure as that of war: raise the money, and instead of spending it in war, spend it in any other way,—you will have still more wealth.
If this be just, it will enable us the more clearly to appreciate two opinions which have been advanced on the subject of national debts.
One is, that a national debt is, to the whole amount of it, or at any rate to a certain part of it, not a defalcation, but an addition to the mass of wealth.
The other is, that admitting the debt to be a defalcation from the mass of national wealth, yet the discharge of it would be, not an addition to that mass, but a defalcation from it.
Both these opinions have had their partisans; for in the whole field of national economy, there is not a proposition, how clear soever, the contrary of which has not had its partisans.
As to the first opinion, one way in which it is maintained is, by looking exclusively to one side of the account—by looking at the income coming in to the annuitants, and not looking at the income going out of the hands of those by whose contributions the money for the payment of these annuities is supplied.
Another way is, by imagining the existence of a capital equal to the capital borrowed and received by government in exchange for the annuities granted—borrowed, and spent as fast as it is borrowed, not to say faster still. This being a new capital created, goes, according to the reckoning of these politicians, in addition to whatever may have been the amount of the old one.
This notion appears to have had for its ground and efficient cause, the language used by the man of finance and the man of law, in describing transactions of this nature. Can a thing have been created, and yet never have existed? Fiction is the parent of confusion and error in all its shapes. False conception generates false language: false language fixes false conceptions, and renders them prolific and immortal. Such as opinions have been, such is language: such as language is, will opinions be.
Would not the nation be the poorer, if a sponge were passed over the national debt? Would not there be so much property destroyed? Not an atom more than would be produced at the same instant. Would not the nation be less wealthy? No: not, at least at the instant of the change. Would it be less happy? Yes: wretched in the extreme. Soon after, would it be less wealthy? Yes: to a frightful degree, by reason of the shock given to security in respect to property, and the confusion that would ensue. Thirty millions a-year that used to be received by annuitants, no longer received—thirty millions a-year that used to be paid in taxes by all classes, and all individuals together, for the payment of those annuitants, no longer paid. National wealth would no more be diminished by the sponge, than it is when a handkerchief is transferred from the pocket of a passenger to the pocket of a thief. Sum for sum, however, the enjoyment produced by gain is not equal to the suffering produced by loss. In this difference, traced through all its consequences, lies the mischief, and the sole mischief, of bankruptcy or of theft.
Annuities paid by government are paid with a degree of regularity (not to speak of certainty) which would in vain be looked for to any extent in annuities paid out of particular funds by individual hands. In the loss of this species and degree of convenience, consists the whole of the loss that would be incurred by the complete discharge of the national debt. This convenience is certainly worth something in the scale of wealth; but it can scarcely be considered as any real tangible addition to the mass of those tangible things, of the mass of which the matter of wealth is composed. There is also inconvenience attending the payment of taxes—(those taxes by the produce of which the matter of these annuities is supplied)—an inconvenience superadded to that which consists merely in the privation attendant on the parting with the money paid in taxes.
On this convenience attending the receipt of the annuity, is grounded another convenience in respect of the facility attending the purchase and the sale of it—attending the process of converting capital into income, and reconverting income into capital, when capital happens again to be the thing wanted.
As to the ground of the other opinion—it appears to be, that if the money taken in taxes, to be applied in discharge of the debt, had not been so taken, but had been left in the pockets of those to whom it belonged, it would have been spent by them, each in his own way, and by that expenditure an addition would have been made to the mass of national wealth—but not so if applied in discharge of debt. But the fact is, that whatever is so applied is given, received, and employed;—the whole of it in the shape of capital;—whereas, had it been left with the parties by whom it is paid in taxes, it would have been employed, more or less of it, as income is employed, when it is said to be spent, without return or hope of return. What the proportion may amount to between the part spent as income, and the part employed as capital, and thereby employed in making a growing addition to the mass of national wealth, will be considered presently. For the present, it is something, not to say sufficient, that in the one case it is only a part that is employed in making an addition to the mass of wealth, and in the other case the whole.
The support given to this opinion is given in two ways. One is, by thinking nothing of what becomes of the money taken in taxes, and made over to the annuitants in discharge pro tanto of the national debt, but considering it as annihilated or thrown away.
The other is, by considering the labour paid for by the money when spent by the proprietor, instead of being taken from him in taxes, as being employed, all of it, in the shape of pecuniary capital, in making a correspondent addition to real capital—just as would have really been the case with the labour paid for by that money, had it been been made over to annuitants in discharge of so much debt.
That a part of it would really have been so employed, does not admit of doubt:—the error consists in considering what is true only of this part, as if it were true of the whole. Let us observe the difference between this part and the whole.
Admitting an increase of wealth, and that a gradual and regular one, the productive capital of the country, taken together with the growing mass of consumed and reproduced wealth continually produced by it, must be considered as increasing at compound interest. The rate of interest can scarcely be taken as so high as 2 per cent.; for at 2 per cent. compound upon the capital, whatever it may amount to in any year, the quantity of it would be rather more than doubled in thirty-five and a half years. The most sanguine estimator will not, I imagine, regard the increase of national wealth to have been, even for the last thirty-five years, increasing at nearly so rapid a rate. If the quantity and value of productive capital have gone on increasing at this rate, the quantity of growing income must have gone on increasing at the same rate; since it is only from the income of that or the preceding year, that the addition made to the capital of any year can be made. If the quantity of growing income have gone on increasing at this rate, the mass of population must have gone on increasing at the same rate, save and except in so far as an increase has taken place in the degree of relative opulence, i. e. so far as an average individual of the posterior period has been richer than an average individual at an anterior period—so far as wealth has gone on increasing faster than population. That wealth has gone on increasing faster than population, is what I should expect to find to be the case; but that the increase should be anything like as much as double, i. e. half as much again, seems too much to believe. The half, or thereabouts, of the aggregate wealth, will be that which is shared among individuals of the poorest class:—and in the case of that class, the wealth of an average individual appears, within the period in question, to have rather diminished than increased.
I take therefore two per cent. for the rate of accumulation—not as the true rate, but for a rate which, though considerably too high, is near enough to the true rate to answer the purpose of illustration. Taking, then, 20 per cent. as the gross ratio of the real income produced by that real capital, to the real capital by the employment of which it is produced,—this two per cent. would constitute one-tenth part of the gross income:—and the part out of income added to capital every year is one-tenth part of the whole mass, of which the other nine parts are partly consumed for maintenance, partly employed in keeping up the real capital in statu quo: that is, in a condition to give birth to the same quantity of real income in each subsequent as in each preceding year.
The whole income, then, of an average individual, may for this purpose be considered as divided into ten parts:—of which nine parts go for present maintenance, added to the expense of providing for reproduction without decrease or increase, and the other tenth to positive increase.
This being the case with the whole income of the average individual, the same division in idea may be made of any part of that income; and, for instance, of that part which he is made to pay in taxes: if he had had none of it to pay in taxes, one-tenth is the part which would have been employed by him in making a net addition to the capital, and thence to the growing wealth of the country, as above.
On this supposition, the addition made to wealth by a million taken from national income by taxes, and employed in the discharge of the national debt, is to the addition that would be made to it by the same million if left in the pockets of those to whom it comes in the shape of income, and left to be employed by them, each in his own way, as ten to one. I say, for illustration, as ten to one; but twenty to one is the proportion I should expect to find come nearest to the truth.