Front Page Titles (by Subject) CHAPTER V.: FINANCIAL ADVANTAGES. - The Works of Jeremy Bentham, vol. 3
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CHAPTER V.: FINANCIAL ADVANTAGES. - 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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The advantages of a financial kind that may be expected from the proposed measure, will require to be distinguished according to the periods or stages above marked out, in regard to the progress of it.
From the opening of the first issue of annuity notes, to the arrival of the 3 per cent. stock annuities at par.
The branches of profit or advantage that may be looked for in the course, or at the conclusion of this first period, may be stated as follows:—
1. Profit on sale by the difference between the price for which a 3 per cent. annuity, as secured by an annuity note, is sold, and the price at which an annuity to the same amount, as secured by an entry in the books of the stock annuities, is bought in with cash raised by the above sale; in a word, profit by difference between the selling price of note annuities and the buying price of stock.—N.B. This branch of profit ceases altogether on the termination of Period I.*
2. Profit by interest forborne to be received on annuity notes.
3. Profit by notes in hand;—profit by interest on annuity notes received by government in the course of circulation, while kept in the hands of government.
4. Profit by notes lost under circumstances which either do not admit of, or do not call for compensation.
5. Profit by reduction of the rate of interest paid by government for such money as it is in the habit of borrowing by annual anticipation, by the issue of exchequer bills.
Profits peculiar to Periods II. and III.
6. Profit by saving upon the expense of management.
7. Profit by fractional interest; i. e. by the 7d. per £100, the difference between the £3 per cent. yielded by stock annuities, and the £2 : 19 : 5 yielded by £100 worth of note annuities.
8. Profit by the redemption of all stock annuities yielding more than 3 per cent., and thereupon by extinction of the masses of extra interest.
Profit peculiar to Period III.
9. Profit by reduction of the rate and quantum of interest upon the mass of the national debt.
10. Profit peculiar to a state of war; i. e. to those years in which money is to be raised by the creation of fresh masses of government annuities;—profit on loans: profit or saving by lessening the loss by those transactions, by raising the price of government annuities as compared with money, and thereby lessening the loss by the difference between money on the creation and sale of government annuities, and money paid on redemption of the same.
11. Profit by yearly interest instead of halfyearly—a profit mentioned as being obvious, and capable of being realized, but not (it is supposed) to advantage.
If to prove the proposed measure to be an advantageous one, and advantageous to a sufficient degree to give it a claim to be carried into practice, it were necessary to prove the quantum of the advantage, or even to give a calculation that had pretension to exactness, its chance for adoption would be weak indeed. Happily for the plan, no such proof can reasonably be required:—whether the profit be £10,000,000, or no more than £10,000, still, although that advantage stood alone, yet supposing it to stand clear and not to be attended with any degree of disadvantage capable of counterbalancing it, the conduct indicated would be just the same: it would be worth adopting, though the advantage were worth no more than £10,000; and it could but be adopted, though the advantage were equal to 100 millions.
Profit I. Profit by the difference between the selling price of a £3 a-year annuity note, and the buying price of a do. stock annuity.
This profit will depend upon the average price of 3 per cent. stock taken out of the market upon the buying-in plan, before the commencement of the period during which, these annuities being at or above par, the paying-off plan will have taken place of the buying-in plan, and the quantum of annuity-note paper issued, and thence the quantity of stock bought in with the produce of such annuity-note paper.
Profit II. The expectation of profit by interest forborne to be received, is grounded on the following proposition, viz.—That in general a man will not bestow either trouble or expense, much less both, how inconsiderable soever the quantity, in compassing an end which he has it in his power to compass to equal perfection without any such trouble or expense.
The trouble (not to speak of the expense) attendant on the receipt of the interest on these annuities, has been reduced to the smallest amount possible; because, the greater it is, the greater the danger lest, by the contemplation of it, individuals should at the outset be repelled from the purchase of these annuities. But be the reduction ever so great, still the remainder will be something; and this remainder, it may reasonably be expected, would, in the ordinary state of things, be sufficient to turn the scale. On the other hand, suppose the circulation of the paper to be once established, upon the terms on which government paper is in the habit of being received—(I speak of exchequer bills, navy victualling, transport and ordnance debentures, not to mention India bonds)—viz. the allowing for it, in addition to the amount of the principal, the amount of the interest that has become due upon it. A man, by simply paying away an annuity note upon that footing, will receive, from the individual who takes it of him, the amount of such interest, without the trouble of applying for it elsewhere.
The smaller the amount of interest or other money to be received, the greater the ratio which the trouble of receiving, whatever it be, will bear to it; accordingly, if there be any difference, it is in the instance of the smaller notes; and the more certainly, the smaller the note, may the dependence on this forbearance be assured.
But the disposition to forbearance will be the more steady, the more perfect and unbroken the facility of receiving the money, in the event of its being thought fit to receive it, appears to be. It is on the strength of the persuasion entertained by a man, that the amount of a banker’s note which he has taken in payment would, if demanded, be paid at any time, that his forbearance to demand it is grounded.
It is on this account, that whether or no the payment of the interest upon a fresh note be deferred till after the end of the year, or be divided into two payments, the first of them to take place at the end of the first half-year—at the end of the year it seems most advantageous, upon the whole, that the even amount of the year’s interest should be made demandable at any time.
1. In regard to the proportion of interest that would be likely to be forborne, thus much may be to be observed:—in regard to whatever portion continued to be employed as currency, the forbearance would probably be general and continual.
2. In regard to whatever part was hoarded for the purpose of furnishing compound interest, it could not take place. To obtain an interest upon a year’s interest due on any note, it would be necessary for a man to receive that interest, and with the money take out a fresh note or assemblage of notes: a second year’s interest is a year’s interest, and no more, in addition to its own amount; it does not give him the interest he might have made on the amount of the same year’s interest, by receiving it in the shape of money, and employing that money in the purchase of a fresh note carrying its interest; or (what would come to the same thing) by receiving it at once from the office, if upon his application the office were to furnish him with it in that shape.
3. In the case of a mass of annuity-note paper kept in hand for the purpose of income, but without any determinate plan of accumulation in the way of compound interest, it seems difficult to say whether receipt or forbearance would be most apt to take place. The purpose of receipt might be equally answered by forbearance; viz. by paying away at each period a mass of paper of an amount equal to what the whole mass had gained in value on the score of interest by that time. But this would require provision to be made accordingly in the composition of the sums constituted by the notes: and which of the two masses of trouble would be the greater,—that of making the provision in question, or that of receiving the interest at an office,—would depend upon circumstances.
In the meantime, this consideration operates as a reason for rendering the composition of the series of notes as favourable as possible to the purpose of affording interest in the way of simple circulation as above described, without the necessity of coming upon government for the payment of it; that is, to render the gradation of the series more regular, and the terms or degrees in it more numerous, than might otherwise be necessary or desireable. The more complete the series of notes, the greater the chance it has of meeting the demand of each individual with reference to this purpose.
As to the quantum of this branch of profit, the principal part—that which may be regarded as certain—will depend upon the quantity of the paper thus employed, and upon the time during which each parcel of that quantity remains in circulation. It will depend consequently on the duration of this first period.
Should this period prove a short one, the probable length of it (according to a supposition that will be stated a little further on) not exceeding two or three years, the branch of profit will be proportionably inconsiderable; but whenever it vanishes, it vanishes (as will be seen) only to make way for a branch of much superior importance. So long as stock annuities are to be purchased under par, none of those persons whose circumstances it suits to become customers for stock annuities, will, in respect of that portion of their money, become customers for note annuities, which will not be to be had but at par price. But no sooner are stock annuities arrived at par price, than these note annuities will be at least as well suited to the circumstances of the customers for stock annuities: and inasmuch as the mass of stock annuities will be lessened every day by the operation of the sinking fund, while the mass of note annuities cannot be increased without diminishing by at least an equal amount the mass of stock annuities, the owners of the continually increasing mass of money seeking to be employed in the purchase of government annuities, to serve as a source of permanent income, will have no other resource than to lie in wait for annuity notes as they pass from hand to hand, and so impound them and take them out of the circulation.
Profit III. The third head of advantage consists in the saving or profit that may be made to accrue on the score of interest upon annuity notes, which, after being received by government from individuals on the score of taxes or otherwise in the way of circulation, remain at the command of government till wanted to be re-issued.
This head of profit will again require to be distinguished into three branches:—
1. Profit by annuity-note paper lying in the exchequer.
2. Profit by do. lying in the hands of receivers of all classes in its way to the exchequer.
3. Do. by do. lying in the way of imprest in the several offices of expenditure, waiting till re-issued.
1. As to the first of these three branches of profit, what the probable annual amount of it may be, is completely out of the knowledge of the writer of these papers, but as completely within the knowledge of those to whom they are addressed: I mean in so far as the past is capable of serving as a guide to the future. Add together the 365 sums respectively existing in the exchequer on the 365 days of the year, and divide the sum by 365; the quotient will be the principal, the interest of which will thus in the course of the year be gained or saved to government, supposing the whole of the money to be in the shape of annuity notes. From this gross amount of principal will require to be deducted, the amount of that proportion of money which is upon an average in the shape of cash.
2. As to the second of the above three branches of profit, it will rest with government whether to take it into its own hands, or to leave it in the hands of the receiver.*
3. In regard to the last of the above three branches, little need be said. The money being already, in the shape of annuity-note paper, yielding an interest to government,—so long as it is in the hands of government, all difficulty in regard to the conversion of it into that shape is out of the question here.
Under the existing plan, much anxiety has every now and then been entertained to prevent this or that subordinate officer of expenditure from getting inordinate sums by way of imprest into his hands. Under the proposed plan, the money being in the shape of paper, that paper yielding its interest to government,—so long as it is in the hands of any office or officer keeping it on the account of government, though the quantity issued from the exchequer to this or that office, upon this or that occasion, should happen to be more than sufficient—in other words, to be excessive—it would be no matter, since not only the temptation to produce the excess, but even the mischief of the excess if produced, would, in the proposed state of things, be done away.
Profit IV. Profit by notes lost under circumstances which either do not admit of, or do not call for compensation.
As this source of profit will go on increasing as the quantity of annuity-note paper increases, and will consequently be inconsiderable in this first period, even at the close of it, in comparison with what it will be at the close of the second period, at which time the conversion of the whole mass of stock annuities into annuities secured by annuity notes will have been completed,—it is to the second period, that what there may be to say in regard to this source of profit, may with most propriety be referred.
Profit V. Profit by reduction of the rate of interest paid on other government paper.
With the fall in the rate of interest yielded by stock annuities, the fall in the rate of interest paid by government on exchequer bills will at least keep pace. As to the absolute quantum of profit on this head, that will of course depend on the amount of exchequer-bill paper issued within the time: a quantity, in regard to which, any calculations or conjectures that could be given would be of little use.
Profit VI. Profit (if taken) by difference between yearly and half-yearly interest. This branch of profit would not attain its maximum until the close of the second period; but I have already stated that my leaning is not to assume this head of profit, and for what reasons. It may, however, be observed, that it would yield a rateable profit of £225 per million, whilst the interest upon the national debt remained at three per cent.
From the arrival of stock annuities at par, to the redemption of the last portion of stock annuities; whereupon follows immediately the opening of the second issue of annuity notes at the reduced rate of 2⅜ per cent.
1. Profit (in the shape of principal-money) by sale of notes ceases; but, in the event of the creation of a fresh parcel of stock annuities, revives and continues till the redemption of such stock annuities.
2. Profit by interest undemanded will continue, and with increase. The profit above mentioned as produced by the notes in circulating hands will increase as the quantity of paper taken out with a view to circulation increases. To this will now be added the profit produced by the notes in hoarding hands; viz. the expelled stockholders who take this paper with a view to permanent income, as they held their stock. This branch may be termed the casual branch: it will arise out of such casual forbearances only as take place at present in the case of dividends on stock. The probable rate of it might be estimated from the course of the payments on this score made at present at the bank.
The quantity of government annuities, stock and note annuities taken together, will, it is true, be growing less and less every day; while the quantity of money capable of being employed in the purchase of them will be growing greater and greater: so that the scarcity will be growing at both ends. But inasmuch as the issue being open all the while, everybody will be at liberty to supply himself with whatever quantity of this paper he chooses, whether for the purpose of hoarding or with a view to circulation, the diminution will fall exclusively upon the stock annuities, the quantity in circulation will not be absorbed in any degree by the demand for the purpose of hoarding; and the only effect of the increasing scarcity, even when the issue is at the point of closing, will be to make the demand, and consequent emission, the more rapid to the last.
3. Profit by notes in hand. This inconsiderable source of profit seems likely to continue from the first period without any variation worth inquiring into. It admits of no increase from the increased amount of annuity-note paper produced by the conversion, that part only which is circulation, being capable of finding its way into government hands.
4. Profit by notes lost. During the whole of this second period, this source of profit will be on the increase; a quantity of annuity-note paper equal to the whole amount of stock annuities, being in the course of it added to the mass.
5. Profit by reduction of interest on exchequer bills. This source of profit will probably have begun to manifest itself in the course of the former period, but it is not till now that the amount could easily be submitted to calculation.* During the whole of this second period, the rate of interest will be that reduced rate towards which it will have been moving on during the first period.
This head of profit will be an enduring one. No plenitude on the part of the exchequer will warrant the disuse of exchequer bills: it would be bad economy to make and keep on foot a perpetual loan to a certain amount, in order to save occasional loans to the same amount, at the same or nearly the same rate of interest: and to keep in hand a sum in cash to the same amount, would come to the same thing. The maximum of advantage under this head is therefore what results from keeping the rate of interest on such loans from rising more than one step above the level of the rate paid on perpetual loans. Upon the adoption of the proposed measure, it would be requisite to examine whether the plan of the present exchequer bills would be the most advantageous plan for borrowing money on such temporary loans.
6. Profit by saving in the expense of management—transfer and allowance of interest, as between individual and individual, being performed without expense—and the expense attached to the issue, and to the payment of interest on government account, being defrayed in part, or in the whole by fees. See Ch. I. Plan, Art. 17. This profit, being a rateable profit on the amount of debt, will of course diminish in amount, as the amount of the debt diminishes.
7. Profit by reduction of interest from £3 to £2: 19s. This profit results from the conversion of stock annuities into note annuities at the par price of both, which will be the price throughout this second period. It amounts to exactly 1-60th part of the interest at 3 per cent. It comes in a manner without design, the difference being the unavoidable result of the defalcation of a few fractions, which it was necessary to get rid of, in order to leave even and commensurable sums.* The amount of annual profit on this score, on each million of capital in stock annuities converted—i. e. on each £30,000 of interest on the said capital—is £500.†
8. Profit by reduction of interest on stock annuities at higher rates than 3 per cent. The amount of this profit might easily be made the subject of calculation.
From the opening of the second issue at 2⅜ths nearly (viz. £2 : 7 : 5) per cent., to the redemption of the paper of that second issue;—whereupon follows immediately the opening of the third issue at £1 : 9 : 6, being a trifle less than 1½ per cent.
I. Profit by reduction from £2 : 19s. per cent. to £2 : 7 : 5 per cent.
This result constitutes the characteristic profit of this third period. The proportionable amount of it is nearly the fifth part of the interest on the mass of annuities remaining, at the commencement of this third period, viz. £5791 : 13 : 4 per annum for each million of capital of annuity notes.
II. Profit on sale, i. e. by difference between selling price of annuity-note paper, and buying price of stock annuities, remains as in Period II., extinct by the extinction of stock annuities;—subject to revival in the event of a fresh creation, as before.
III. & IV. Profits by interest undemanded, and by notes in hand, continue as in Period II. with little change.‡
V. & VI. Profits by notes lost, and by saving in respect of the expense of management, being rateable profits, their amount per million’s worth of paper continues unchanged, but their total amount diminishes of course in some degree, as the amount of annuity notes (which, from the commencement of this third period, are the only redeemable government annuities remaining) is diminished by the operation of the sinking fund.
For some time at least, the paper of this second issue carrying but £2 : 7 : 5 a-year interest, the demand for it, with a view to circulation, will be more certain than the demand for the purpose of permanent income on the footing of stock annuities: because to the former set of customers, the whole amount of interest, reduced as it is, will be as so much gain; being a profit which, but for this species of paper, they would not have made—perhaps at all—certainly not in this commodious way, and by government annuities:—whereas the reduction will sit heavy on the customers for permanent income, who, if they continue their money upon government security, must submit to see their incomes reduced to this amount, and whose capitals to a considerable amount will accordingly, for the purpose of escaping such reduction, be withdrawn from this employment, and either laid out upon other securities, or embarked along with the owners in some branch of trade.
The progress of the operation may, notwithstanding, not be diminished upon the whole; for to the amount of the demand with a view to circulation, no assignable limits can be found.
Profit VII. Profit in respect of Exchequer bills. During this third period, in compariison with the second, the rate of profit will receive an increase.
For the money wanted for occasional purposes during the second period, it will (as has been seen) have been necessary to give a rate of interest one step higher than that which, by the continual emission of annuity notes at that rate to all customers, it was in the power of everybody to make. But the first issue being now closed, it is no longer in the power of everybody or anybody to obtain government annuities at that rate; since, though paper of the first issue will still be to be had of individuals, it will not be to be had but at an advanced price. The profit by the saving of this advanced price will be sufficient to engage customers to take exchequer bills, at the par price of the closed issue, to an amount adequate to any money that can be wanted on the footing of a temporary loan.
From the opening of the third issue at 1½ per cent. nearly (viz. £1:9:6 per cent.,) to the redemption of the last portion of paper of that issue;—whereupon follows immediately the opening of the fourth issue at £1 : 3 : 8½ per cent., being a trifle more than 1⅙ per cent.
The annual amount of this head of profit, for this fourth period, is, for each million of capital remaining in the hands of individuals, i. e. for each £30,000 of interest at the original rate of 3 per cent., £8958 : 6 : 8;—the total amount of profit by reductions of interest up to this period inclusive, on each million of capital, £15,259.
Profits by notes lost, and by expense of management saved, will continue as before, with little change in regard to the rate, but in respect of the total amount, reduced in course as the quantity of the annuities in question is reduced.
So in regard to profit by interest undemanded, and profit by notes in hand.
Profit in respect of exchequer bills, will at this period, if not before, be so far fixed, as that the rate of interest upon these temporary loans will never be higher, but more likely lower, than that of the closed issue. For although the reduced rate of the open issue should not be accepted of by the expelled annuitants of the closed issue, nor even by any more of the customers for note paper with a view to circulation; yet, for the reasons given with reference to Period III., the premium given for the paper of the closed issue will, notwithstanding, be considerable: the more so, as the drop from the rate given by the closed issue (the second issue) to the rate given by the third issue (being the issue that remains open till the very close of this fourth period) is so great. Between the two amounts in question, a profit sufficient to draw purchasers for exchequer bills cannot but find room to place itself; and the interest on exchequer bills during this period may be expected to be considerably less than £2 : 7 : 5.
The precise number of reductions which the rate of interest upon this paper might be destined to experience, is what it would be too much to attempt to fix. But a picture of the last moments of the expiring debt, at whatever stage the reduction of interest may then be, may be not without its use.
It will present the profit by interest undemanded in an enlarged and interesting point of view: it will strike off in effect the last 10, or 20, or 30 millions of the debt; and strike off perhaps the value of a year or two or more from the duration of that load.
After the exoneration thus effected in the course of the fourth period by the reduction of the rate of interest to the £1 : 9 : 6 which is the rate given by the paper of the third issue,—is it or is it not likely that the reduction of interest should have descended lower before the redemption of the last portion of the principal of the debt?
The reduction of the rate of interest on the money that had been thus lent to government will stop short of this mark, or stop at it, or go beyond it, according to the influence which the rate thus allowed by government turns out to exercise over the rate of interest in general. That the influence which the government rate of interest has in its rising state maintained over the general rate of interest, has been considerable, is matter of known experience—though the operation of the restrictive laws which stop the rise at the point of five per cent. even on the slenderest security, has rendered the amount of this influence scarcely capable of being measured. The influence of the rate of interest paid on the debt cannot but increase with the magnitude of the debt, to which the magnitude of the mass of capital poured into the market (as will be seen) by the redemption of that debt, will be proportioned. The effect of 200 millions thus poured in cannot but be double (it should seem) to that of 100 millions, at least if poured in within the same compass of time.
The influence of the capital poured in by the redemption of the national debt at the time the reduction of the interest on that debt is going on, will (it is true) not depend solely on the quantum of capital thus poured in, but also on the magnitude of the growing mass of national capital into which it flows. But the general mass of national capital is also of itself in a rapid state of increase; and to such a degree on the increase, as to be of itself in a way to effect a reduction in the rate of interest in general, without any aid from this or any other factitious source. Accordingly, the factitious cause of reduction—the factitiously accumulated capital which is thus poured in by government, so far from finding any obstruction in the magnitude and vis inertiæ of the mass into which it flows, finds a powerful assistance in the operation of that mass, acting as it is already, in a direction tending to the same end.
If, then, while the two forces, the natural and the factitious, are thus acting in this direction, the influence of the factitious should be strong enough to bring the other to the same pace, things will continue on in the same state as already depicted in the account of the fourth period: paper of a closed issue, in a quantity which cannot be increased;—paper of an open issue, in a quantity which will be continually and rapidly on the increase, till, by the produce of it, the paper of the closed issue has been paid off, when a fresh issue will be opened, at a still lower rate, and the now open issue closed, and so on: always paper of two issues, at two rates of interest, till the last applied portion of redemption money comes and sweeps them both out of the market at once.
If, then, the reduction of the rate of interest go on to the last year of the debt without stopping, the state of the paper during that last year, in respect of its being divided into paper of two issues (viz. a closed issue, and an open one,) will be the same at that supposed last period of the existence of this paper, and of the redeemable part of the national debt, as is exhibited in speaking of the advantages belonging to the fourth period of its existence: the paper swept off by the last mass of redemption-money will be paper of two different issues.
On the other hand, if the emission and consequent reduction have stopped anywhere, there will, at that last stage, be but one rate of interest paid by government on the redeemable part of the debt: the annuity-note paper remaining at the time will be, all of it, of the same issue—viz. the then closed issue:—there being at that time another issue opened, but no paper of that proffered issue in existence,—nobody having purchased any at that price.
For illustration’s sake, let the last issue which meets with customers be the above-mentioned third issue,—the issue at £1 : 9 : 6, with the opening of which the fourth period commences: let thirty millions, at this time, be the amount of the whole remainder of the debt, of which let ten millions be the amount of the paper of the second issue now closed, bearing interest at £2 : 7 : 5 per cent.: and let the other twenty millions be paper of the third, or open issue, bearing interest at £1 : 9 : 6 per cent.: and let the ten millions at £2 : 7 : 5 per cent. be all of it in the hands of persons who keep it in hand as a source of permanent income; while the 20 millions at £1 : 9 : 6, is all of it in a state of circulation more or less rapid, being all of it in hands that took it out, or received it with that view.
The sinking funds, taken altogether—the sinking funds present and future—being now in a condition to pay off (suppose) ten millions in the course of a year, let such payment be made accordingly. This extinction, falling of course upon those ten millions, strikes off the whole of the hoarded paper, and leaves only that part which, being in circulation, constitutes so much of the circulating capital of the country. Upon the redemption of the last parcel of these ten millions, the opening of the fourth issue follows of course, by article 22. If any purchasers presented themselves at the rate of this fourth issue (£1 : 3 : 8½ per cent.) the reduction of the rate of interest would go on. But by the supposition, no such purchaser does present himself. The persons who had been keeping their capitals in the shape of annuity-note paper of the second issue at £2 : 7 : 5, are, by the redemption of the remaining paper of that issue, put to their option—either to cease letting their capital lie on that sort of security, or to accept of £1 : 3 : 8½ per cent. By the supposition, they all reject the paper bearing this new and lowest rate: they will not meddle with it, not even for a time, and with a view of putting it into circulation by employing it in the ways in which they determine to employ the capital thus thrown upon their hands.
When the two masses of paper that had till now been in the market, are thus reduced to one, that one will, all of it, be in the hands of noteholders who take it with a view to circulation. For, whatever rate of interest is accepted on the footing of permanent income, there will be always persons in abundance to whom it will be worth while to accept of the next lowest rate, with a view to circulation. If, by the growth of national opulence, a rate so low as £2 : 7 : 5 appears now, is raised to such a pitch of relative value as to be worth acceptance in the character of a source of permanent income, the next lowest rate, though so low as £1 : 9 : 6, will be raised along with it in the scale of importance, and will become not less worth acceptance in the character of a source of such temporary profit as could not with equal security and convenience be made by any other means. And if the £1 : 9 : 6 itself come to be thought worth acceptance in the character of a permanent provision and sole dependence, the next lowest rate, though now reduced to £1 : 3 : 8½, will no more be regarded with contempt in the character of a source of temporary profit, than the £1 : 9 : 6 was before. If, then, the demand for annuity-note paper should stop altogether at any period prior to that of the complete extinction of the debt, it is with the customers for permanent income that it will stop, and not with the customers for temporary income with a view to circulation.
Compared with cash, the interest afforded by the annuity-note paper to those who take it or keep it with a view to circulation, will, be it ever so small, be so much profit. Compared with the preceding higher rate of interest, the reduced rate afforded by the annuity-note paper will, to those who take it, and who, to the extent of their respective capitals so invested, have nothing else to depend upon for their respective incomes, present itself as a loss to the amount of the difference.
Under these circumstances (though, for illustration’s sake, the supposition has been that the fresh issue would at some period remain open without customers) it seems not very easy to abide by it. At the time the sinking fund came with its ten millions, and swept off all the paper of the second issue—all the paper that was in the hands of customers for permanent income—the demand on the part of the customers for temporary income with a view to circulation, had got no farther than the remaining 20 millions. But, under the accumulation of wealth inseparable from the state of things thus supposed, it is scarcely possible that the demand, from that class of customers, should for any length of time be altogether at a stand. If, in a twelvemonth, but a single £100 worth more than could be met with without giving such a premium as would make it dearer than the paper of the open issue, were wanted by any person for a few weeks or months, he would betake himself to the open issue.
Even in the case of the last group of now expelled note-holders, by whom this paper had been held as a source of permanent income, the supposition of their rejecting the paper of the fresh issue altogether appears scarcely tenable. They would still, to a certain degree, be customers for annuity-note paper, though with different views: before their expulsion, for the purpose of permanent income—after their expulsion, for the purpose of temporary income, till a better income or better prospects could be obtained from some other source.
True it is, that by the paper taken out of their hands they made £2 : 9 : 6 a-year; while by the paper of the fresh issue they would make not half the money—£1 : 3 : 8½. But £1 : 3 : 8½, which they might begin making from the very instant of their expulsion, would be £1 : 3 : 8½ better than nothing—which is what the interest of a considerable part of their 10 millions of capital would be reduced to, for a time more or less considerable, if it rejected this accommodation. And though no more than a single £100 of the expelled 10 millions were to betake itself to this employment, though it were but for a day, from thence would be to be dated the birth of the paper of the fourth issue.
If, however, at the period in question, there remain no paper but of one issue, it is all of it (as we have seen) in the hands of the customers for temporary income with a view to circulation, who would, generally speaking, betake themselves to the circulation for the interest of it,—upon which, the demand for interest at the office would nearly cease. But the same cessation might take place although there were to be paper of two issues—and would take place, if the paper of both issues were to be in the hands of the customers for temporary income with a view to circulation. Nor is this any more than what might well enough take place; since the paper of the closed issue would bear a premium corresponding to the superior rate of interest it afforded;* and it would be seen by government to be the case, if the interest upon the paper of the closed issue were seen to remain undemanded.
In this state of things, many millions of government paper still in circulation, and little or no interest demanded on it, there seems nothing to be gained and something to be lost by carrying the redemption any further. As to so much interest as continues to be undemanded, the debt ceases to be a burthen;—the taxes, from which the redemption money would have to come, would be a burthen; and the paper taken out of the circulation by the redemption would be so much taken from the mass of circulating capital—as much so as if gold to that amount, after having been received by government on the score of taxes, were to be thrown into the sea. A defalcation made to any such amount as the supposed 20 millions in the course of two years, might, by its suddenness, be productive of inconveniences such as it would not be easy to estimate;† —similar, in a word, to those which have been attributed to the diminution in the quantity of Bank of England paper in circulation.
Were the redemption thus to cease, it might be of use to declare, at the time that such cessation were declared, that from thenceforward, as often as a note were sent in for payment of interest, interest and principal should be paid together,* as is the practice at present in the case of exchequer bills; and at the same time to declare a respite of the redemption for a certain time.
The advantages would be—
1. The continuance of the source of profit in question (profit by interest undemanded) would be more steady and assured. For in proportion to the length of the respite declared, the paper thus respited would come to bear in circulation a premium; the amount of which premium, though limited by the rate of interest yielded by the open issue (resorted to or not resorted to) would not be prevented by it from taking place. This premium a man would lose, by sending in his paper to be paid off at par: in general, then, paper would not be sent in for that purpose, nor consequently any interest be paid by government.
2. No payment could thenceforward be made upon the proposed paper, but that a payment to a far greater amount would go in redemption of principal; whereas, without such regulation, no part of the money paid could take that profitable course.
The undemanded interest (it might be thought) might in this way come to accumulate to such a mass as might be productive of inconvenience, if by a sudden turn of affairs it were to become a matter of advantage to the whole body of annuitants to claim payment of it at once. But on a second glance, the inconvenience would be seen to vanish altogether. Supposing, as before, the amount of the paper twenty millions—rate of interest £1 : 9 : 6;—the whole amount of a year’s interest would thus be short of £300,000. Being simple interest, not compound, the whole amount of it in twenty years would be short of six millions, supposing the whole of it to remain undemanded, and the principal undiminished all that time. No issue can carry more than its own interest; because, as the open issue fills, the paper of the closed issue is paid off, interest and principal together. Respite is indeed proposed; but the term of respite need not be so long as to preclude government from providing such a course of redemption as should ward off any inconvenience that might ensue from a too sudden diminution of this part of the currency, and at the same time prevent the interest from swelling to any such amount as to become formidable. At the worst, at such a period, interest so low, money so abundant, £6,000,000 would be but a trifle to raise by an immediate and temporary loan, as now by exchequer bills.
By so many per cent. as the market price of old annuities is raised by any cause, by so many per cent. (it is well known) is the price of new annuities raised to those who give money for them to government (i. e. the terms of the loan bettered) by that same cause:—since, as between old and new the value is just the same, it would be in vain for any man, or set of men, to insist upon any considerably greater price in annuities for their money (allowance made for depreciation by increase of quantity and for dealer’s profit) than people in general are disposed to take for theirs.
Whatever takes stock out of the market, without taking out or keeping back the equivalent in money, adds in proportion to the price of stocks. The proposed measure takes stock out of the market without taking out or keeping back money: it therefore adds in proportion to the price of stocks.
True it is, that even previously to the absorption of stock annuities which it takes out of the market, it has created other annuities to a considerable part of the amount; for it is only with the money received for those new annuities, that the old are taken out. But of the money thus received for the new annuities, there is not any part that would have gone to market for old annuities; because, while stocks are under par, no money that can be employed with advantage in the purchase of stocks, can be employed otherwise than to a manifest disadvantage in the purchase of the inferior rate of interest afforded by the proposed note annuities.
Any melioration thus produced in the price of stocks, and thence in the terms of the loan for any given year, will operate (it should be remembered) not only on the loan of that year, but on all succeeding loans during the existence of the existing debt; since, whatever additions the debt may come to experience in the course of any number of succeeding years, it will always be the less by the amount of all the defalcations that have been ever made from it.†
Were it not for the operation of the sinking fund, the profit on this account would be so much clearer; but inasmuch as, to the extent of the stock purchased in the year by that fund, government loses exactly as much as it gains on the stock sold in that same year in and by the loan, the amount of the loss by the purchase will be always to be deducted from that of the profit by the sale.
To calculate the probable amount of profit on this score, for one, two, or more years, would require two sets of data;—viz. 1. Amount of the several other causes of elevation, together with those of depression, in each year;—2. The amount of annuity-note paper sold in each year. The former would scarcely yield to calculation; the latter bids defiance to it altogether.
[* ]This branch of profit will have for its accompaniment, and that, as we have seen already, an inseparable one, the effect, and that an advantageous one, of taking out of the market a mass of stock equal to the mass of annuity paper issued, although the burthen on government, in respect of the mass of annuity to be paid, remain the same. But though the effect be produced immediately and at all events, the profit resulting from it depends upon two other circumstances;—viz. the having money to raise for the creation of government annuities, and the arrival of the period which will put into the hands of government the power of bringing its annuitants to consent to a reduction in the amount of their several annuities. These constitute two perfectly distinguishable branches of profit, which will be considered in their respective places.
[* ]The interest upon exchequer bills ceases when they are paid into the hands of the receivers of taxes.
[* ]These papers appear to have been written in August 1800. At that time Mr. Bentham calculated the annual saving upon £6,500,000 of exchequer bills at £126,234 per annum.
[* ]Table showing the principal sums of the several notes entering into the composition of £100 worth of annuity-note paper, with their respective amounts of interest, taken from Table of Annuity, Note Currency.
[† ]A portion of profit under this head would arise in Period I. It will, however, reach its maximum at the end of Period II., thenceforward its amount will decrease as the amount of the debt diminishes.
[‡ ]Profit by interest undemanded ceases, it is to be remembered, at every reduction, in proportion as the conversion from the paper bearing the higher rate, into paper bearing the lower rate goes on:—because, whenever a note is paid off, the whole amount of interest remaining due upon that note must be discharged as well as the principal. It follows that, in regard to the paper of such issue, the time of forbearance cannot date from any earlier period than the opening of that issue.
[* ]The premium is a necessary condition of the co-existence of two papers of the same denominative value, bearing different masses of interest: a man would never give £100, or the value, for a mass of paper called £100, and yielding £1 : 3 : 8½ a-year interest, if for the same price he could get a mass of paper which, though called but £100, yielded £1 : 9 : 6 a-year interest.
[† ]See further, Chapter VI. Advantage by addition to National Capital.
[* ]By this restriction, the amount of the premium might perhaps be made less than it would have been otherwise;—but this would comparatively be of little moment.
[† ]This, though so evidently true as to appear little better than nugatory, will be apt enough to be overlooked, or even appear disputable: for such will naturally enough be the case, if, after rising the first year of the application of the given cause of elevation, stocks should, in consequence of fresh causes of depression, experience a fall the next, or any other succeeding year.