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302.: From [CHARLES TOWNSHEND] - Adam Smith, Glasgow Edition of the Works and Correspondence Vol. 6 Correspondence of Adam Smith 
Correspondence of Adam Smith, ed. E. C. Mossner and I. S. Ross, vol. VI of the Glasgow Edition of the Works and Correspondence of Adam Smith (Indianapolis: Liberty Fund, 1987).
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From [CHARLES TOWNSHEND]
MS., SRO Buccleuch Collection GD224/471/1; Scott, ‘Adam Smith at Downing Street, 1766–7’, Economic History Review vi (1935–6), 85–8; Fay 115–16 (excerpt).
[? end of Oct./end of Dec. 1766]1
I have the Favor of yours of the 27th of October, which is a fresh proof of your goodness to me, and an additional Specimen of your application and knowledge. Our investigation now grows more difficult and delicate, and it seems necessary to review the whole as far as we have advanced, and bring it into one state.2 I mean to do this in this letter, and, after having opened to you my thoughts, upon the several heads, into which the subject naturally divides itself, I will venture to suggest some further matter for consideration.
In the first place, then, I think we agree in our Idea of considering the Sinking Fund as consisting of the surplusses of the Three Funds3 seperate from other surplusses since carried to it and therefore now included in it in common Speech. You approve of the Periods which I have chosen:4 you adopt the account of the progress of the Sinking Fund by the reduction of interest and allow this to have been the only cause.5
In the next place our difference of Totals arises in every instance merely from your taking in the lesser figures, except in the two instances of an error of subtraction and of an oversight in the manner of transcribing the produce of the Sinking Fund in 1739 from a wrong Sum in the column. As yet I have not been able to explain the seeming inconsistency upon the comparison of the years 1729 and 1738, but I hope to reconcile the several accounts and wish you would turn your thoughts to it.
In stating the saving consequential of the reduction of the interest made by Mr Pelham in 1749 as it took place in 1758 I follow the calculation made at the time of the proposition.6 It may be seen in the Gentleman’s Magazine for that year, but I should be glad to know whether it took full effect, tho’ I have little doubt of it.7
You are certainly right in stating the produce of the supply of the three funds previous to the incorporation of them into a Sinking Fund in 1717 at 239211 : 11 : 2 1/2 and I was led into my error by Mr Fane’s mistake.8
Your table formed to illustrate my general position that the whole increase of the Sinking Fund has proceeded from reductions of interest and not from improvement of the branches is clear and decisive.
Your state of the produce of the Sinking Fund from 1717 to 1763 is I believe accurate, and the inferences from it self–evident.9
In addition to these preliminary materials we only want a clear state of the present sinking fund, its produce and its mortgage, and of the outstanding debts unprovided for.
I will now proceed to consider our present situation in the same detail, and from thence I shall naturally be led to make some remarks upon the several applications of the Sinking Fund which you have suggested, and to add some loose and imperfect thoughts which have occurred to me.
You are sensible how much our establishments are liable to variation; of the fluctuation of the Sinking Fund and the incertainty of [?Each years] annual charges, and therefore you will of yourself consider the estimates of these, not as certain, but as presumed Expenses, to serve for the grounds of calculation and argument merely.
Our charges then last year were
This may presumed to be now the established plan of civil expense in time of Peace, too subject to increase upon every foreign event, and not likely to be lessened from furgality or change of system.
but from this Surplus of 1,05186414 must be deducted also the sum now taken out of the Sinking fund in payment of the interest of debts charged for the present on this Fund viz. 140000 and the interest of 1000,000 lent last year by the Bank charged also on this Fund—30,000.15
The Nett Surplus of the sinking fund therefore, if computed at 1800000, after the current services have been answered and the interest already laid upon it has been discharged will be
The declared and unfunded debt is generally and fairly computed at 7000,000. This debt, once liquidated must in a short time be either provided for at 4 per cent or discharged. If it be disposed of as the former debt was at the close of the wars17 and charged on the Sinking Fund at 4 per cent that will make another deduction of 280000 from 881764 : 6 : 318 and make the final free surplus of the Sinking Fund only 601764.18 which sum, encreasing by the addition of the interest of the parts discharged, will not pay off 7,000,000 in less than about ten years.
Thus Upon this plan the most strict application of the utmost computed produce of the nett Surplus of Sinking Fund remaining after present mortgages are discharged will not bring us within sight of the Capital of our funded debt of 130000,000 til at the end of about 10 years:19 during which time the Stocks will in that case probably remain in their present low state, and consequently no measures of any kind can be taken for the discharging any part of the capital debt. Private interests will for the same reason be kept at the present high rate, for who will lend his money upon private security at less than 4 per cent when he can have that public interest for 94£ and 3 per cent for [?] 3 [?].20
The evident inconvenience, oppression and danger resulting from this dilatory plan, necessarily leads men of zeal and active minds to think of all methods of quickening and invigorating the measure.
Among the methods it has been proposed to grant annuities upon the part of the sinking fund, upon which I would make these observations. First that until the expiration of about ten years there will be no surplus of the Sinking Fund at liberty for such use. Secondly that the Terms upon which these and all Annuities must be granted would be governed by the interest of money, and therefore the present time seems to be unfavourable for such a measure, and lastly it has ever been a doubt whether the market would take off any large Sum of annuities at one time.
Others have suggested that it might be right to entrust the Treasury with the power of purchasing such parts of the debt as They judge proper from time to time. To the fairness of this proposal, I have no objection, because the sale is voluntary, and it is indifferent to A whether He sells to the public or to B, but great and just objection would be made to the power of purchasing and influencing stock being in one Hand. The price of the Funds turns upon the confidence in Government and Peace; the duration of Peace may be made seemingly incertain by any measure of administration and just to the degree and at the Time They please: by every such temporary variation They may lower the funds, and if They have the power of buying at the same instant, a legal stockjobbing in one sense of the word will be said to be established by act of Parliament, in which the Public indeed will be the Jew but the Minister will be the broker and the subject the Dupe. I wish this impression could be obviated, and the abuse prevented by restraints and directions, but I fear it can not.
What then remains? Are we to hesitate upon every method and propose no other—victims of irresolution and delay. No! I will suggest another Plan: which is the simple one of ameliorating the branches of your Revenue, enriching the Sinking Fund, and appropriating the frequent and future Surplus in time of peace. The Branches I would ameliorate are your Customs, by a better method of preventing illicit trade, your Excise by better changes and regulations in the Soap and tea duty: by lessening the duties on Coffee, and by varying the duties on Spirits. I would enrich the Sinking Fund by new taxes in themselves proper, such as the late duty on French Cambricks, a tax on Servants, and other such wise regulations for the encouragement of labour and commerce. I would also fall upon plantations in the forests, and the settlement of waste lands, which adding people and produce would of course encre[as]e interior consumption, the only true source of solid Revenue. I will add to these a real American Revenue.21
I compute these united branches at about 400,000£ nett additional income, which added to 600000 nett present surplus would make an appropriated summ of 1,000,000 every year encreasing, the sight of which would instantly, and still more as the operation of it drew near to the Funded debt, raise the stocks, invigorate circulation, restore credit, and thereby put things into such a state as to admit of trying the reduction of interest by opening subscriptions for the same debt on lower terms, or granting Annuities, or borrowing money directly.
This is my plan; consider it, and speak without reserve upon every part of this memorial (for I cannot call it a letter) without reserve and pitty.
I have now only one article left to trouble you upon and that is the propositions of Sir J. Bernard.22 His scheme in 1746 was formed in the hour of great distress, and his proposition in 1737 was founded, as you say, on the rate of interest and the price of Stocks at that time. When the same case exists, the same measure will be right.
I recollect one thing still remaining and that is the composition of the annuities for terms and survivorship and the time of their expiration. This grows a material consideration and should be examined; I have not the means.
I will prepare a state of the branches I would regulate, and some computation of the produce of the dutys I would raise, and show them to you.
I have now done for the present. Let me hear soon from you: and when I come to Town (which will be at the end of this month) we must compare our final judgements.
Adieu! I am much obliged to you for your aid and patience with me.
[1 ]This letter or ‘memorial’ was found among Charles Townshend’s papers in the Buccleuch Collection, and it is in his hand except for some figures in that of Adam Smith. This fact and the tone of the opening sentence suggest that Smith was the person addressed, but no letter from him dated 27 Oct. 1766 has been traced. It would presumably have been sent from Paris, for Smith and the Duke of Buccleuch reached Dover on 1 Nov. (Rae 226). Scott conjectured that Townshend sought Smith’s help with a research project on taxation while the latter was in France. There is some evidence to support this in the data concerning French finance also among the Townshend papers, which Smith could well have collected. This corresponds with material in a bound volume of MSS. entitled ‘Etat actuel des finances’ and bearing Smith’s book–plate, now in the Goldsmith’s Library, University of London (Scott, ‘Smith at Downing Street’, 83, 85; Mizuta 21–2).
[2 ]Townshend was engaged in writing a ‘History of the Sinking Fund’. The incomplete MS. is also part of the Buccleuch Collection: SRO GD 224/47/2. The entry on the schedule of the MSS. reads: ‘Mr. Townshend’s History of the Funds and many calculations and other papers by Mr Smith, with other papers relating thereto. This History is very long, and copied in several parts by my brother and myself. I hope to be able to put it together. Note Mr Smith’s papers were taken out’ (Scott, ‘Smith at Downing Street’ 80). The brothers are identified in a pencilled, marginal note as ‘the Messrs Barrett’. Smith was apparently asked to supply facts, theoretical points, and recent information on French finance.
[3 ]As a result of legislation that received royal assent on 17 July 1717, the surpluses of the ‘General yearly fund’, Aggregate Fund, and South Sea Fund were to be paid into a Sinking Fund, to discharge ‘the principal and interest of such national Debts and Incumbrances as were incurred before the 25th day of December 1716 in such manner as shall be directed or appointed by any future Acts of Parliament and to or for none other use, intent, or purpose, whatsoever’ (3 Geo. I, c. 7, s. 37, quoted in P. G. M. Dickson, The Financial Revolution in England: A Study in the Development of Public Credit 1688–1756 (London, 1967), 86).
[4 ]1688–97; 1697–1714; 1715–21 (unfinished, draws attention to Walpole’s wise system of finance); 1722–9; 1730–8 (unfinished); cf. WN V.iii. 41–3 for Smith’s corresponding account of the accumulation of the National Debt.
[5 ]In WN V.iii.27, Smith notes the first step was inducing creditors of the public to accept 5% interest, occasioning a saving of 1% on the capital of the greater part of the debts funded in perpetuity, and of one–sixth of the greater part of the annuities paid out of the General, Aggregate, and South Sea Funds. This saving left a surplus in the tax returns in these funds after annuity payments had been deducted, and by 1717 laid the foundation for the Sinking Fund. In 1727, the interest of the greater part of the public debt was reduced to 4%; in 1753 and 1757 to 3·5 and 3%; and these reductions further augmented the Sinking Fund.
[6 ]On 16 Nov. 1749, Henry Pelham (c.1695–1754), First Lord of the Treasury, outlined proposals to reduce the National Debt by dropping the interest on 4% debt to 3·5%; leaving it at that rate for seven years; then further dropping it to 3%. He preceded these proposals by finding means to raise 3% Government stock above par and reduce India bonds from 4 to 3% (Gentleman’s Magazine, Nov. 1749, 1; Dickson, op. cit., 230–1; 233).
[7 ]By Christmas 1757, 88% of the 4% debt had been reduced to 3·5%; and seven years later to 3%. The cost of servicing the funded debt as a result was reduced by about 12% to begin with, and by nearly 25% from 1757, though war loans by this time almost negated the fall (Dickson 239).
[8 ]?Henry Fane (1703–77), M.P., Chief Clerk of the Treasury 1742–57; Clerk to the Privy Council 1756–64. He was trained in Treasury business under Walpole and his uncle, John Scrope (HP ii. 413).
[9 ]The ‘table’ and ‘state of the produce of the Sinking Fund’ were presumably removed with other papers of Smith’s; see n. 2 above.
[10 ]Christopher D’Oyly (c. 1717–95), War Office, First Clerk 1761–2, Deputy–Secretary Jan. 1763–Jan. 1772; M.P. 1774–84; confidant of Townshend.
[11 ]Thomas Bradshaw (1733–74), Chief Clerk at Treasury Dec. 1761–Feb. 1763; Commissioner of Taxes Feb. 1763–Aug. 1767; M.P. 1767–74.
[14 ]An error of £100 corrected in the previous deduction was not caught in the subsequent figures.
[15 ]Eighteenth–century budgets were constructed on the basis of pledging the main items of customs and excise revenue to the interest of particular loans, also assigning the surplus from an increase of yield or reduction to interest to the discharging of debt through the Sinking Fund, as documented by Smith in WN V.iii 43–6. New taxes were commonly justified as providing interest on the capital sums that would be borrowed against them (Fay 105, n. 1).
[17 ]Efforts were made to reduce the National Debt at the close of the War of Austrian Succession in 1748, and the close of the Seven Years War in 1763. For details, see the appropriate sections of the following vols. of British Parliamentary Papers: xxxiii (1857–8), Return of the National Debt of Great Britain and Ireland 1691–1857; xxxv (1868–9), Accounts of public income and expenditure of Great Britain, 1688 ff.; xlviii (1890–1), Report of the proceedings of the commissioners for reducing the National Debt 1786–1890; liii (1898), History of the earlier years of the Funded Debt from 1694 to 1786.
[18 ]These figures are corrected in Smith’s hand.
[18 ]These figures are corrected in Smith’s hand.
[19 ]This estimate is much too low.
[20 ]If an investor bought 3 per cents at 94, he would obtain nearly £3. 4s. per cent.
[21 ]James West, in a report to the Duke of Newcastle, described the opening of Townshend’s budget on 15 Apr. 1767, as follows: ‘He stated the expence of the year at £88 million and then stated the Ways and Means. Proposed the Land and Malt at £2. 7. The Sinking Fund, which with the additions he had got from the sweeping of the Treasury and the Pay Office, he should make 400,000 . . . the American Revenue 110,000. . . . With regard to the funds for the payment of interest on the 1½ million proposed to be borrowed
The whole received with universal satisfaction and applause.’ Townshend had been interested in an American revenue as early in his parliamentary career as 1753, and was always associated with plans for remodelling the colonial administration. In 1767 the House of Commons passed resolutions inspired by Townshend that suspended the legislative functions of the New York Assembly; established Commissioners of Customs in America to superintend the trade laws; and proposed specific taxes (10 and 13 May). Among the latter was the famous imposition on tea (Financial Resolutions of 2 June), which lead in time with other incitements to the American reaction of the Boston Tea Party of 16 Dec. 1773. No evidence has been found indicating Smith suggested or approved of American duties, and Townshend’s list seems to have been advised by close associates outside the Cabinet such as Samuel Touchet and John Huske (Fay 104–6; HP ii. 661; iii. 535, 540, 542, 543, 547).
[22 ]Sir John Barnard (c. 1685–1764), son of a Quaker wine merchant, turned Anglican, left the wine trade and made a moderate fortune as an insurer with Lloyd’s; served as London alderman 1728–58, Lord Mayor 1737–8; M.P. for the City of London 1722–61. In the House of Commons and in print he argued consistently that the return on government stock truly determined private rates of interest, and that in consequence a reduction of interest in the Funded Debt was a necessary condition of cheaper capital in the economy. In 1737 he proposed that taxes should be cut proportionately after a reduction of interest to 3%, but the Government leaders convinced a majority of the Commons that taxes could not be cut until the National Debt had been reduced through the Sinking Fund. In 1746, to combat the depressed condition of the market caused by the Jacobite rising, Barnard suggested raising £3 million by lotteries, with the attached loans having different rates of interest. The aim here was to eliminate the profits of the middle men by going directly to the public for subscriptions. Loans based on Barnard’s scheme were raised in 1747–8. See Sir John Barnard’s two pamphlets: Reasons for the More Speedy Lessening the National Debt and Taking Off the Most Burthensome of the Taxes (1737), and A Defence of several Proposals for Raising of Three Millions for the Service of the Government for the year 1746 (1746); also Dickson, op. cit., 213–14, 224–5, 478.