Front Page Titles (by Subject) CHAPTER X.: REDUCTION OF INTEREST—PROPOSED MODE COMPARED WITH MR. PELHAM'S. - The Works of Jeremy Bentham, vol. 3
The Online Library of Liberty
A project of Liberty Fund, Inc.
Search this Title:
CHAPTER X.: REDUCTION OF INTEREST—PROPOSED MODE COMPARED WITH MR. PELHAM’S. - 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.
About Liberty Fund:
Liberty Fund, Inc. is a private, educational foundation established to encourage the study of the ideal of a society of free and responsible individuals.
The text is in the public domain.
Fair use statement:
This material is put online to further the educational goals of Liberty Fund, Inc. Unless otherwise stated in the Copyright Information section above, this material may be used freely for educational and academic purposes. It may not be used in any way for profit.
REDUCTION OF INTEREST—PROPOSED MODE COMPARED WITH MR. PELHAM’S.
Reduction of Interest is a declared object with Parliament:—the only question is as to the mode.
To exhibit the comparative eligibility as between the two plans—(the one here proposed for the future, and the one pursued in time past by Mr. Pelham)—I shall consider them together under the several heads of expense—celerity of operation—previous assurance of success—and gentleness of operation:—not forgetting, with respect to Mr. Pelham’s, the possibility of applying it at the present time to the immensely increased mass of debt.
I. As to Expense—viz. as compared with profit.—In Mr. Pelham’s time, the profit consisted in reducing to 3 per cents. the whole amount of the then existing quantity of 4 per cents.; that is, reducing the quantum of interest paid on the nominal capital of £57,703,475, from about £2,308,136 to about £1,731,102.
When the operation was first mentioned by him in parliament, it was a sign that then at least the state of the money market was ripe for it; otherwise he could not have obtained the requisite assurance of the money for paying off in case of refractoriness:—how much longer it might have already been ripe, it would be in vain to attempt to calculate. This being assumed, whatever respite he allowed—whether as to the whole or as to a part of the interest proposed to be struck off—is to be considered as a price, or bonus, which under the plan proposed it was looked upon as advisable in point of prudence to allow to the stockholders, in order to purchase their acquiescence, and insure the plan against the hazard of failure. I say, to prudence; for as to sympathy for the sufferings of the individuals damnified, the professedly vindictive measures pursued afterwards against the repugnants are a sufficient proof that no such motive was consulted in the arrangements of the terms.
1. A year’s interest was allowed in the first plan without reduction:—i. e. the amount of the one per cent. that was to be afterwards struck off by the reduction, £577,034, was allowed for the first year.*
2. Half of the one per cent. ultimately struck off was allowed for seven years more. This for one year was £288,517;—for the seven years £2,019,619. Adding the one per cent. for the first year, makes the total price paid for consent, £2,596,653;—deducting £426,980 discount for the several years to come, leaves the amount of the money paid for the £577,034 a-year thus saved, £2,169,673.
This £2,169,673 (thus paid for consent to the reduction) amounts to a little more than 1-27th of the amount of the capital of £57,703,475, upon which the reduction of the 4 per cent. to 3 per cent. was thus effected: a little less than £2,308,136, which would be the exact amount of four year’s purchase of the perpetual annuity thus struck off. Such, then, was the price that on Mr. Pelham’s plan was given for a consent, which upon the proposed plan would be obtained gratis.
On the proposed plan, the quantum of interest that would be struck off by the first reduction (meaning the reduction effected in the course of the two first periods, by conversion of 4 and 5 and 3 per cents. into capitals bearing £2 : 19s. per cent.) by means of the paper of the first issue, would be £1,212,608.
That, upon any proposed reduction to be effected at this time of day, the same terms precisely should be offered as were offered at that time of day, would, under the vast difference of circumstances, be a supposition altogether untenable; but as it would be a fruitless attempt to determine what would be the terms now offered, the only terms on which any argument can be grounded are the above.†
On that supposition, the price to be paid for a consent to the striking off a mass of permanent annuities to the above amount of £1,212,608 a-year, would be a little less than four times that sum: it would be £4,559,458: exactly four times would be £4,850,432.‡
3. A sacrifice which may be added to the expense attending the reduction of interest, as above, is—that of going on with the redemption of the principal of the debt. By Mr. Pelham’s plan, this latter mode of liberation was given up: even in point of right, for eight years—and in intention, perhaps for ever. Since the establishment of the existing sinking funds, it could not now be given up upon any terms; and supposing it possible, and deemed eligible, to adopt the principle of Mr. Pelham’s reduction plan to a certain extent, it could not be adopted without such modifications as would be necessary to render it compatible with the institution of those redemption funds.
On the proposed plan, reduction of interest and redemption of principal afford assistance to each other: reduction to redemption, by the supplies it pours into the fund;—redemption to reduction, by the sums which, by expelling them out of the old annuities, it drives into the new.
4. Another sacrifice that would be to be made upon Mr. Pelham’s plan was—of the eventual advantage of ulterior reductions:—the very right given up for eight years as before—and for any subsequent period, no foundation laid, nor prospect opened, for anything that appears.
On the proposed plan, issue follows issue—reduction, reduction—as wave follows wave,—execution treading without respite upon the heels of possibility. What space of time each reduction would occupy, is scarcely open to conjecture:—thus much is certain, that there is not a moment’s interval between the completion of one reduction and the commencement of the next.
II. Celerity of Operation constitutes a head of comparison different in name, but in effect carried to account already, under the head of Expense. A given sum is worth the less, as the time for receiving it is more distant. Acceleration is profit—retardation, loss.
III. Previous Assurance of Success.
That Mr. Pelham’s plan was practicable, was proved by the event. But for a long time it was likely to have failed: and had it failed, it would have failed in toto; since, if the reduction had not been submitted to in respect of nearly the whole mass, it could not have taken place as to any part. Had not the quantity of uninscribed stock (about 3¼ millions) been small enough to admit of its being paid off, the submission, testified in respect of the subscribed stock, could hardly have been accepted: nor could the plan have taken place in any degree, without a joint and simultaneous operation on the part of one or other of two numerous sets of parties—viz. the stock holders, who were called upon to submit to the reduction—or the monied men, from whom, as far as the expected submission failed of taking place, the money was to come for paying off the repugnants.
But though practicable then, in respect of the 57 or 58 millions in question then, it does not follow that it would be practicable now, in regard to the amount of debt now in question, not even although stocks should arrive at par.
In regard to reduction on the proposed plan, success is, as we have seen, independent of contingencies. In each year—month—day, the process will go on to the utmost extent consistent with the state of the money market at that time. By the proposed subscription plan—by the consequent competition for respite from further deductions—the first reduction might be rendered in a manner instantaneous; and a very short space of time would be sufficient for the accomplishment of it, even without any such aid. The 5 or 6 millions (which would by that time be the amount of a year’s produce of the sinking fund,) call it 5 millions—this vibrating without ceasing between the stock market and the annuity-note market, would be sufficient to dispatch the reduction, and with prodigious rapidity, although the subscription plan were untried, or tried without effect. In the machinery thus put in motion, no part is liable to stop of itself for want of the assistance of any other—and as it is at the beginning, so is it at the end.
During the first issue, every note then issued pays off by the money it produces, and thus, converts into note annuities, a corresponding portion of stock annuities. During the second issue, every note then issued converts in the same way, into paper bearing the reduced rate of interest of that second issue, a correspondent portion of the paper of the first issue:—and a single note thus taken out in the way of issue, would bring about the reduction upon that portion of capital, and in a determinable time even upon the whole capital, although not another note were ever to be issued on the same terms.
Once put in motion, the machine keeps going of itself, without any fresh winding up, so long as there remains a particle of the debt for it to act upon and cut down:—nothing is left to depend on circumstances of the moment—nothing on the humours of individuals;—no interval between reduction and reduction—no pausing, deliberating, negotiating, debating, fumbling:—nor yet is the process exposed to the charge of precipitation or excess,—government having it in its power to stop or retard the operation at any time, by stopping or retarding the influx of the primum mobile from the sinking fund.*
IV. Lastly, as to Gentleness of Operation. Of Mr. Pelham’s plan, it is upon record that it experienced much opposition, and created much dissatisfaction. It was in the nature of it so to do. It brought forward the minister in an obnoxious attitude, calling upon men to submit to a loss to the amount of a perpetual tax of 25 per cent. upon income, subject only to an abatement to the amount of about four years’ purchase, on the condition of their lending their hands to a sacrifice of which they were the sole victims.
Accordingly, though on the ground of justice nothing could be more unimpeachable, ill-humour on one side appears to have begot ill-humour on the other—on the part of the authors of the suffering, as well as on the part of the sufferers themselves. On those who stood out at first, harder terms were afterwards imposed; and, to judge from the debates, the professed motive was not merely economy but vengeance.*
By the proposed plan, no such invidious task is put into the hands of any one. Before anything of hardship shows itself (at least to the great class of individuals here in question—the stockholders,) the measure will have been known—known for years as a measure of universal accommodation. Every man’s money will have been breeding money in his pocket—every man who has sold out, will have sold to an advantage. When hardship comes at last, it will be at the end of a long chain of causes and effects, the first link of which has been removed by time, almost out of the reach of observation. The immediate cause, being everybody’s act, is nobody’s. No new act—none at least that carries anything of compulsion on the face of it, is required at this (or indeed at any time) on the part of government.
On Mr. Pelham’s plan, everything turning upon subscription, a man knew not but that he was subscribing to his own loss. On the proposed plan, the loss takes place at any rate, and the effect of a subscription is all gain to him. The quantity of this gain depends upon his own exertions; and the bustle of competition serves to call off his mind from the suffering which is to come.
[* ]This, it may be thought, should not be considered as constituting part of the bonus, inasmuch as in some of the acts, and probably in all the acts prior to that date, it will be found that a year’s notice previous to redemption was among the stipulated terms. On the other hand, if instead of waiting for meditations and negotiations, and observations to be taken of the times, a plan had been adopted in the first instance, such as (like the proposed plan) would have given the public the benefit of the reduction from the instant that the rise in the rate of interest in general, and of money in the funds in particular, had rendered the commencement of it practicable, the probability seems to be, that the extra interest, not only of the year in question, but of one or more preceding years, might have been saved.
[† ]Written 1800.
[‡ ]As £577,034 is to £2,169,673, so is £1,212,608 to £4,559,458.
[* ]This being so perfectly opposition-proof, is a feature by which the proposed mode of reduction stands distinguished in a very striking point of view from every other. Though this consequence of the proposed conversion were ever so clearly foreseen, by those who, either from factious motives, or on the honest ground of personal motives, were disposed to thwart it, though it were even expressly announced by government (as indeed virtually it could not but be,) it would not be in the power even of conspiracy so much as to impede it. By refusing the paper, each conspirator would make a complete and certain sacrifice of his own personal advantage, without the smallest chance of affording any sensible help to the common object of the conspiracy. Limitation only, not prevention—limitation to a degree altogether without effect—would be the utmost possible result of the most unanimous and most persevering opposition on this ground.
[* ]In the case of the second set of subscribers, two years were struck off from the half per cent. for seven years that had been allowed to the first set. First act, 23 Geo. II. c. 1. Second act, 23 Geo. II. c. 22.