Front Page Titles (by Subject) FUNDING SYSTEM AN ARTICLE IN THE SUPPLEMENT TO THE FOURTH, FIFTH AND SIXTH EDITIONS OF THE ENCYCLOPAEDIA BRITANNICA 1820 - The Works and Correspondence of David Ricardo, Vol. 4 Pamphlets and Papers 1815-1823
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FUNDING SYSTEM AN ARTICLE IN THE SUPPLEMENT TO THE FOURTH, FIFTH AND SIXTH EDITIONS OF THE ENCYCLOPAEDIA BRITANNICA 1820 - David Ricardo, The Works and Correspondence of David Ricardo, Vol. 4 Pamphlets and Papers 1815-1823 
The Works and Correspondence of David Ricardo, ed. Piero Sraffa with the Collaboration of M.H. Dobb (Indianapolis: Liberty Fund, 2005). Vol. 4 Pamphlets and Papers 1815-1823.
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First published by Cambridge University Press in 1951. Copyright 1951, 1952, 1955, 1973 by the Royal Economic Society. This edition of The Works and Correspondence of David Ricardo is published by Liberty Fund, Inc., under license from the Royal Economic Society.
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|Loan each Year||Amount of Loans||Amount of Interest||Amount of Taxes||Surplus|
If, instead of thus diminishing the loan each year, the same amount of taxes precisely had been raised, and the sinking fund had been applied in the usual manner, the amount of debt would have been exactly the same at any one of these periods. In the third column of the above table it will be seen that, in the 5th year, the debt had increased to 92,371,844l. On the supposition that 200,000l. per annum had each year been added to the sinking fund, and invested in stock by the commissioners, the amount of unredeemed debt would have been the same sum of 92,371,844l., as will be seen by the last column of the following table:
|Loan each Year||Amount of Loans||Debt redeemed each Year||Amount Debt Redeemed||Interest on Debt Redeemed||Debt remaining Unredeemed|
A full consideration of this subject, in all its details, has led Dr. Hamilton to the conclusion, that this first mode of raising the supplies during war, viz. by diminishing the amount of the annual loans, and stopping the purchases of the commissioners in the market, would be more economical, and that it ought therefore to be adopted. In the first place, all the expences of agency would be saved. In the second, the premium usually obtained by the contractor for the loan would be saved, on that part of it which is repurchased by the commissioners in the open market. It is true that the stocks may fall as well as rise between the time of contracting for the loan, and the time of the purchases made by the commissioners; and, therefore, in some cases, the public may gain by the present arrangement; but as these chances are equal, and a certain advantage is given to the loan contractor to induce him to advance his money, independently of all contingency of future price, the public now give this advantage on the larger sum instead of on the smaller. On an average of years this cannot fail to amount to a very considerable sum. But both these objections would be obviated, if the clause in the original sinking fund bill, authorizing the commissioners to subscribe to any loan for the public service, to the amount of the annual fund which they have to invest, were uniformly complied with. This is the mode which has, for several years, been strongly urged on ministers by Mr. Grenfell,1 and is far preferable to that which Dr. Hamilton recommends. Dr. Hamilton and Mr. Grenfell both agree, that, in time of war, when the expenditure exceeds the revenue, and when, therefore, we are annually increasing our debt, it is a useless operation to buy a comparatively small quantity of stock in the market, while we are at the same time under the necessity of making large sales; but Dr. Hamilton would not keep the sinking fund as a separate fund, Mr. Grenfell would, and would have it increased with our debt by some known and fixed rules. We agree with Mr. Grenfell. If a loan of twenty millions is to be raised annually, while there is in the hands of the commissioners ten millions which they annually receive, the obvious and simple operation should be really to raise only ten millions by loan; but there is a convenience in calling it twenty millions, and allowing the commissioners to subscribe ten millions. All the objections of Dr. Hamilton are by these means removed; there will be no expence for agency; there will be no loss on account of any difference of price at which the public sell and buy. By calling the loan twenty millions, the public will be induced more easily to bear the taxes which are necessary for the interest and sinking fund of twenty millions. Call the loan only ten millions, abolish, during the war, the very name of the sinking fund in all your public accounts, and it would be difficult to show to the people the expediency of providing 1,200,000l. per annum by additional taxation, for the interest of a loan of ten millions. The sinking fund is, therefore, useful as an engine of taxation; and, if the country could depend on ministers, that it would be faithfully devoted to the purposes for which it was established, namely, to afford at the termination of war a clear additional surplus revenue beyond expenditure, in proportion to the addition made to the debt, it would be wise and expedient to keep it as a separate fund, subject to fixed rules and regulations.
We shall presently inquire, whether there can be any such dependence; and, therefore, whether the sinking fund is not an instrument of mischief and delusion, and really tending rather to increase our debt and burthens than to diminish them.
It is objected both to Dr. Hamilton’s and Mr. Grenfell’s projects, that the disadvantages which they mention are trifling in degree, and are more than compensated by the steadiness which is given to the market by the daily purchases of the commissioners,—that the money which those purchases throw into the market is a resource on which bankers and others, who may suddenly want money, with certainty rely.
Those who make this objection forget, that, if by the adoption of this plan, a daily purchaser is withdrawn from the market, so also is a daily seller. The minister gives now to one party ten millions of money to invest in stock, and to another party as much stock as ten millions costs to sell; and as the instalments on the loan are paid monthly, it may fairly be said that the supply is as regular as the demand. It cannot be doubted, too, that a loan of twenty millions is negotiated on worse terms than one of ten; it is true that no more stock will remain in the market at the end of the year, whether the one or the other sum be raised by loan; but for a time the contractor must make a large purchase, and he must wait before he can make his sale of ten millions to the commissioners. He is induced then to sell much more largely before the contract, which cannot fail to affect the market price; and it must be recollected, that it is the market price on the day of bidding for the loan which governs the terms on which the loan is negotiated. It is looked to both by the minister who sells, and the contractor who purchases. The experiment on Mr. Grenfell’s suggestion was tried for the first time in the present year, 1819; the sum required by Government was twenty-four millions, to which the commissioners subscribed twelve millions. In lieu of a loan of twenty-four millions from the contractor, there was one only of twelve millions; and as soon as this arrangement was known, previous to the contract, the stocks rose 4 or 5 per cent., and influenced the terms of the loan in that degree. The reason was, that a preparation had been made for twenty-four or thirty millions loan, and as soon as it was known that it would be for twelve millions only, a part of the stock sold was repurchased. Another advantage attending the smaller loan is that 800 per million which is paid to the bank for management of the loan is saved on the sum subscribed by the commissioners.
Dr Hamilton, in another part of his work, observes, “If the sinking fund could be conducted without loss to the public, or even if it were attended with a moderate loss,1 it would not be wise to propose an alteration of a system which has gained the confidence of the public, and which points out a rule of taxation that has the advantage at least of being steady. If that rule be laid aside, our measures of taxation might become entirely loose.2
“The means, and the only means, of restraining the progress of national debt are, saving of expenditure, and increase of revenue. Neither of these has a necessary connection with a sinking fund. But, if they have an eventual connection; and, if the nation, impressed with a conviction of the importance of a system established by a popular minister, has, in order to adhere to it, adopted measures, either of frugality in expenditure, or exertion in raising taxes, which it would not otherwise have done, the sinking fund ought not to be considered as inefficient, and its effects may be of great importance.”3
It will not, we think, admit of a doubt, that if Mr. Pitt’s sinking fund, as established in 1792, had been always fairly acted upon, if, for every loan, in addition to the war-taxes, the interest, and a 1 per cent. sinking fund, had been invariably supplied by annual taxes, we should now be making rapid progress in the extinction of debt. The alteration in principle which was made in the sinking fund by the act of 1802 was, in our opinion, a judicious one; it provided, that no part of the sinking fund, neither that which arose from the original million, with its addition of 200,000l. per annum, nor that which arose from the 1 per cent. raised for the loans since 1792, should be applicable to the public service, till the whole of the debt then existing was redeemed. We should have been disposed to have extended this principle further, and to have made a provision, that no part of the sinking fund should be applicable to the public service, until the whole of the debt then existing, and subsequently to be created, should be redeemed. We do not think that there is much weight in the objection to this clause, which was made to it by Lord Henry Petty in 1807, and referred to, and more strongly urged by Mr. Vansittart1 in 1813. The noble Lord said,2 “I need hardly press upon the consideration of the committee, all the evils likely to result from allowing the sinking fund to accumulate without any limit; for the nation would be exposed, by that accumulation, to the mischief of having a large portion of capital taken at once out of the market, without any adequate means of applying it, which would, of course, be deprived of its value.
“This evil must appear so serious to any man who contemplates its character, that I have no doubt it will be felt, however paradoxical it may seem, that the redemption of the whole national debt at once would be productive of something like national bankruptcy, for the capital would be equivalent almost to nothing, while the interest he had before derived from it would be altogether extinguished. The other evils which would arise from, and which must serve to demonstrate the mischievous consequence of a prompt discharge of the national debt, I will show presently. Different arrangements were adopted in the further provisions made on the subject of the sinking fund in 1792 and in 1802. By the first the sinking fund of 1 per cent., which was thenceforward to be provided for every new loan, was made to accumulate at compound interest until the whole of the debt created by such new loan should be extinguished. And, by the second arrangement, all the various sinking funds existing in 1802 were consolidated, and the whole were appropriated to accumulate at compound interest until the discharge of the whole of the debt also existing in 1802. But the debt, created since 1802, amounting to about one hundred millions of nominal capital, is still left subject to the acts of 1792, which provides for each separate loan a sinking fund of only 1 per cent. on the nominal capital. The plan of 1802, engrafted on the former acts of 1786 and 1792, provided for the still more speedy extinction of the debt to which it applied. But it would postpone all relief from the public burthens to a very distant period (computed, in 1802, to be from 1834 to 1844); and it would throw such large and dis-proportionate sums into the money market in the latter years of its operation, as might produce a very dangerous depreciation of the value of money. Many inconveniences might also arise from the sudden stop which would be put to the application of those sums when the whole debt should have been redeemed, and from the no less sudden change in the price of all commodities, which must follow from taking off at one and the same moment taxes to an extent probably then much exceeding thirty millions. The fate of merchants, manufacturers, mechanics, and every description of dealers, in such an event, must be contemplated by every thinking man with alarm; and this applies to my observation respecting a national bankruptcy, for, should the national debt be discharged, and such a weight of taxation taken off at once, all the goods remaining on hand would be, comparatively speaking, of no value to the holders, because, having been purchased or manufactured while such taxation prevailed, they must be undersold by all those who might manufacture the same kind of goods after such taxation had ceased. These objections were foreseen, and to a certain degree acknowledged, at the time when the act of 1802 was passed: and it was then answered, that, whenever the danger approached, it might be obviated by subsequent arrangements.” A great many of these objections appear to us to be chimerical, but, if well founded, we agree with the latter part of the extract, “whenever the danger approached, it might be obviated by subsequent arrangements.” It was not necessary to legislate in 1807, or in 1813, for a danger which could not happen till between 1834 and 1844. It was not necessary to provide against the evils which would arise from a plethora of wealth at a remote period, when our real difficulty was how to supply our immediate and pressing wants.
What are the evils apprehended from the extravagant growth of the sinking fund, towards the latter years of its existence? Not that taxation will be increased, because the growth of the sinking fund is occasioned by dividends on stock purchased; but first, that capital will be returned too suddenly into the hands of the stockholder, without his having any means of deriving a revenue from it; and, secondly, that the remission of taxes, to the amount probably of thirty millions, will have a great effect on the prices of particular commodities, and will be very pernicious to the interest of those who may deal in or manufacture such commodities.
It is obvious that the commissioners have no capital. They receive quarterly, or daily, certain sums arising from the taxes, which they employ in the redemption of debt. One portion of the people pay what another portion receive. If the payers employed the sums paid as capital, that is to say, in the production of raw produce, or manufactured commodities, and the receivers, when they received it, employed it in the same manner, there would be little variation in the annual produce. A part of that produce might be produced by A instead of by B; not that even this is a necessary consequence, for A, when he received the money for his debt, might lend it to B, and might receive from him a portion of the produce for interest, in which case B would continue to employ the capital as before. On the supposition, then, that the sinking fund is furnished by capital and not by revenue, no injury would result to the community, however large that fund might be,—there might or might not be a transfer of employments, but the annual produce, the real wealth of the country, would undergo no deterioration, and the actual amount of capital employed would neither be increased nor diminished. But if the payers of taxes, for the interest and sinking fund of the national debt, paid them from revenue, then they would retain the same capital as before in active employment, and as this revenue, when received by the stockholder, would be by him employed as capital, there would be, in consequence of this operation, a great increase of capital,— every year an additional portion of revenue would be turned into capital, which could be employed only in furnishing new commodities to the market. Now the doubts of those who speak of the mischievous effects of the great accumulation of the sinking fund, proceed from an opinion they entertain that a country may possess more capital than it can beneficially employ, and that there may be such a glut of commodities, that it would be impossible to dispose of them on such terms as to secure to the producers any profits on their capitals. The error of this reasoning has been made manifest by M. Say, in his able work Economie Politique,1 and afterwards by Mr. Mill, in his excellent reply to Mr. Spence, the advocate of the doctrine of the Economistes.2 They show that demand is only limited by production; whoever can produce has a right to consume, and he will exercise his privilege to the greatest extent. They do not deny that the demand for particular commodities is limited, and therefore they say, there may be a glut of such commodities, but in a great and civilized country, wants, either for objects of necessity or of luxury, are unlimited, and the employment of capital is of equal extent with our ability of supplying food and necessaries for the increasing population, which a continually augmenting capital would employ. With every increased difficulty of producing additional supplies of raw produce from the land, corn, and the other necessaries of the labourer, would rise. Hence wages would rise. A real rise of wages is necessarily followed by a real fall of profits, and, therefore, when the land of a country is brought to the highest state of cultivation,— when more labour employed upon it will not yield in return more food than what is necessary to support the labourer so employed, that country is come to the limit of its increase both of capital and population.
The richest country in Europe is yet far distant from that degree of improvement, but if any had arrived at it, by the aid of foreign commerce, even such a country could go on for an indefinite time increasing in wealth and population, for the only obstacle to this increase would be the scarcity, and consequent high value, of food and other raw produce. Let these be supplied from abroad in exchange for manufactured goods, and it is difficult to say where the limit is at which you would cease to accumulate wealth and to derive profit from its employment. This is a question of the utmost importance in political economy. We hope that the little we have said on the subject will be sufficient to induce those who wish clearly to understand the principle, to consult the works of the able authors whom we have named, to which we acknowledge ourselves so much indebted. If these views are correct, there is then no danger that the accumulated capital which a sinking fund, under particular circumstances, might occasion, would not find employment, or that the commodities which it might be made to produce would not be beneficially sold, so as to afford an adequate profit to the producers. On this part of the subject it is only necessary to add, that there would be no necessity for stockholders to become farmers or manufacturers. There are always to be found in a great country, a sufficient number of responsible persons, with the requisite skill, ready to employ the accumulated capital of others, and to pay to them a share of the profits, and which, in all countries, is known by the name of interest for borrowed money.
The second objection to the indefinite increase of the sinking fund remains now to be noticed. By the remission of taxes suddenly to the amount probably of thirty millions per annum, a great effect would be produced on the price of goods. “The fate of merchants, manufacturers, mechanics, and every description of dealers, in such an event, must be contemplated by every thinking man with alarm; for should the national debt be discharged, and such a weight of taxation taken off at once, all the goods remaining on hand would be, comparatively speaking, of no value to the holders, because having been purchased or manufactured while such taxation prevailed, they must be undersold by all those who might manufacture the same kind of goods after such taxation had ceased.”1 It is only then on the supposition that merchants, manufacturers, and dealers, would be affected as above described, that any evil would result from the largest remission of taxes. It would not of course be said, that, by remitting a tax of 5l. to A, 10l. to B, 100l. to C, and so on, any injury would be done to them. If they added these different sums to their respective capitals they would augment their permanent annual revenue, and would be contributing to the increase of the mass of commodities, thereby adding to the general abundance. We have already, we hope, successfully shown, that an augmentation of capital is neither injurious to the individual by whom it is saved, nor to the community at large, —its tendency is to increase the demand for labour, and consequently the population, and to add to the power and strength of the country. But they will not add these respective sums to their capitals,—they will expend them as revenue! The measure cannot be said to be either injurious to themselves or to the community on that account. They annually contributed a portion of their produce to the stockholder in payment of debt, who immediately employed it as capital; that portion of produce is now at their own disposal; they may consume it themselves if they please. A farmer who used to sell a portion of his corn for the particular purpose of furnishing this tax, may consume this corn himself,—he may get the distiller to make gin of it, or the brewer to turn it into beer, or he may exchange it for a portion of the cloth which the clothier, who is now released from the tax, as well as the farmer, is at liberty to dispose of for any commodity which he may desire. It may indeed be said, where is all this cloth, beer, gin, &c. to come from; there were no more than necessary for the general demand before this remission of taxes; if every man is now to consume more, from whence is this supply to be obtained? This is an objection of quite an opposite nature to that which was before urged. Now it is said there would be too much demand and no additional supply; before, it was contended that the supply would be so great that no demand would exist for the quantity supplied. One objection is no better founded than the other. The stockholders, by previously receiving the payment of their debt, and employing the funds they received productively, or lending them to some other persons who would so employ them, would produce the very additional commodities which the society at large would have it in their power to consume. There would be a general augmentation of revenue, and a general augmentation of enjoyment, and it must not, for a moment, be supposed that the increased consumption of one part of the people would be at the expence of another part. The good would be unmixed, and without alloy. It remains then only to consider the injury to traders from the fall in the price of goods, and the remedy against this appears to be so very simple, that it surprises us that it should ever have been urged as an objection. In laying on a new tax, the stock in hand of the article taxed is commonly ascertained, and, as a measure of justice, the dealer in such article is required to pay the imposed tax on his stock. Why may not the reverse of this be done? Why may not the tax be returned to each individual on his stock in hand, whenever it shall be thought expedient to take off the tax from the article which he manufactures, or in which he deals? It would only be necessary to continue the taxes for a very short time for this purpose. On no view of this question can we see any validity in the arguments which we have quoted,1 and which have been so particularly insisted on by Mr. Vansittart.
There are some persons who think that a sinking fund, even when strictly applied to its object, is of no national benefit whatever. The money which is contributed, they say, would be more productively employed by the payers of the taxes, than by the Commissioners of the Sinking Fund. The latter purchase stock with it, which probably does not yield 5 per cent. the former would obtain from the employment of the same capital much more than 5 per cent. consequently the country would be enriched by the difference. There would be in the latter case a larger nett supply of the produce of our land and labour, and that is the fund from which ultimately all our expenditure must be drawn. Those who maintain this opinion, do not see that the commissioners merely receive money from one class of the community and pay it to another class, and that the real question is, Which of these two classes will employ it most productively? Forty millions per annum are raised by taxes, of which twenty millions, we will suppose, is paid for sinking fund, and twenty millions for interest of debt. After a year’s purchase is made by the commissioners, this forty millions will be divided differently, nineteen millions will be paid for interest, and twenty-one millions for sinking fund, and so from year to year, though forty millions is always paid on the whole, a less and less portion of it will be paid for interest, and a larger portion for sinking fund, till the commissioners have purchased the whole amount of stock, and then the whole forty millions will be in the hands of the commissioners. The sole question then with regard to profits is, Whether those who pay this forty millions, or those who receive it, will employ it most productively?—the commissioners, in fact, never employing it at all, their business being to transfer it to those who will employ it. Now, of this we are quite certain, that all the money received by the stockholder, in return for his stock, must be employed as capital, for if it were not so employed, he would be deprived of his revenue on which he had habitually depended. If then the taxes which are paid towards the sinking fund be derived from the revenue of the country, and not from its capital, by this operation a portion of revenue is yearly realized into capital, and consequently the whole revenue of the society is increased; but it might have been realized into capital by the payer of the tax, if there had been no sinking fund, and he had been allowed to retain the money to his own use! It might so, and if it had been so disposed of, there can be no advantage in respect to the accumulation of the wealth of the whole society by the establishment of the sinking fund, but it is not so probable that the payer of the tax would make this use of it as the receiver. The receiver when he gets paid for his stock, only substitutes one capital for another,—and he is accustomed to look to his capital for all his yearly income. The payer will have all that he paid in addition to his former revenue; if the sinking fund be discontinued he may indeed realize it into capital, but he may also use it as revenue, increasing his expenditure on wine, houses, horses, clothes, &c. The payer might too have paid it from his capital, and, therefore, the employment of one capital might be substituted for another. In this case too, no advantage arises from the sinking fund, as the national wealth would accumulate as rapidly without it as with it, but if any portion of the taxes paid expressly for the sinking fund be paid from revenue, and which, if not so paid, would have been expended as revenue, then there is a manifest advantage in the sinking fund, as it tends to increase the annual produce of our land and labour, and as we cannot but think that this would be its operation, we are clearly of opinion that a sinking fund, honestly applied, is favourable to the accumulation of wealth.
Dr. Hamilton has followed Dr. Price in insisting much on the disadvantage of raising loans during war in a 3 per cent. stock, and not in a 5 per cent. stock. In the former, a great addition is made to the nominal capital, which is generally redeemed, during peace, at a greatly advanced price. Three per cents. which were sold at 60, will probably be repurchased at 80, and may come to be bought at 100. Whereas in 5 per cents. there would be little or no increase of nominal capital, and as all the stocks are redeemable at par, they would be paid off with very little loss. The correctness of this observation must depend on the relative prices of these two stocks. During the war in 1798, the 3 per cents. were at 50, while the 5 per cents. were at 73, and at all times the 5 per cents. bear a very low relative price to the 3 per cents. Here then is one advantage to be put against another, and it must depend upon the degree in which the prices of the 3 per cents. and 5 per cents. differ, whether it be more desirable to raise the loan in the one or in the other. We have little doubt that, during many periods of the war, there would have been a decided disadvantage in making the loan in 5 per cent. stock in preference to a 3 per cent. stock. The market in 5 per cent. stock, too, is limited, a sale cannot be forced in it without causing a considerable fall, a circumstance known to the contractors, and against which they would naturally take some security in the price which they bid for a large loan if in that stock. A premium of 2 per cent. on the market price, may appear to them sufficient to compensate them for their risk in a loan in 3 per cent. stock;—they may require one of 5 per cent. to protect them against the dangers they apprehend from taking the same loan in a 5 per cent. stock.
II. After having duly considered the operation of a sinking fund, derived from annual taxes, we come now to the consideration of the best mode of providing for our annual expenditure, both in war and peace; and, further, to examine whether a country can have any security, that a fund raised for the purpose of paying debt will not be misapplied by ministers, and be really made the instrument for creating new debt, so as never to afford a rational hope that any progress whatever will permanently be made in the reduction of debt.
Suppose a country to be free from debt, and a war to take place, which should involve it in an annual additional expenditure of twenty millions, there are three modes by which this expenditure may be provided; first, taxes may be raised to the amount of twenty millions per annum, from which the country would be totally freed on the return of peace; or, secondly, the money might be annually borrowed and funded; in which case, if the interest agreed upon was 5 per cent., a perpetual charge of one million per annum taxes would be incurred for the first year’s expence, from which there would be no relief during peace, or in any future war; of an additional million for the second year’s expence, and so on for every year that the war might last. At the end of twenty years, if the war lasted so long, the country would be perpetually encumbered with taxes of twenty millions per annum, and would have to repeat the same course on the recurrence of any new war. The third mode of providing for the expences of the war would be to borrow annually the twenty millions required as before, but to provide, by taxes, a fund, in addition to the interest, which, accumulating at compound interest, should finally be equal to the debt. In the case supposed, if money was raised at 5 per cent., and a sum of 200,000l. per annum, in addition to the million for interest, were provided, it would accumulate to twenty millions in 45 years; and, by consenting to raise 1,200,000l. per annum by taxes, for every loan of twenty millions, each loan would be paid off in 45 years from the time of its creation; and in 45 years from the termination of the war, if no new debt were created, the whole would be redeemed, and the whole of the taxes would be repealed.
Of these three modes, we are decidedly of opinion that the preference should be given to the first. The burthens of the war are undoubtedly great during its continuance, but at its termination they cease altogether. When the pressure of the war is felt at once, without mitigation, we shall be less disposed wantonly to engage in an expensive contest, and if engaged in it, we shall be sooner disposed to get out of it, unless it be a contest for some great national interest. In point of economy, there is no real difference in either of the modes; for twenty millions in one payment, one million per annum for ever, or 1,200,000l. for 45 years, are precisely of the same value; but the people who pay the taxes never so estimate them, and therefore do not manage their private affairs accordingly. We are too apt to think, that the war is burdensome only in proportion to what we are at the moment called to pay for it in taxes, without reflecting on the probable duration of such taxes. It would be difficult to convince a man possessed of 20,000l., or any other sum, that a perpetual payment of 50l. per annum was equally burdensome with a single tax of 1000l. He would have some vague notion that the 50l. per annum would be paid by posterity, and would not be paid by him; but if he leaves his fortune to his son, and leaves it charged with this perpetual tax, where is the difference whether he leaves him 20,000l., with the tax, or 19,000l. without it? This argument of charging posterity with the interest of our debt, or of relieving them from a portion of such interest, is often used by otherwise well informed people, but we confess we see no weight in it. It may, indeed, be said, that the wealth of the country may increase; and as a portion of the increased wealth will have to contribute to the taxes, the proportion falling on the present amount of wealth will be less, and thus posterity will contribute to our present expenditure. That this may be so is true; but it may also be otherwise—the wealth of the country may diminish—individuals may withdraw from a country heavily taxed; and therefore the property retained in the country may pay more than the just equivalent, which would at the present time be received from it. That an annual tax of 50l. is not deemed the same in amount as 1000l. ready money, must have been observed by every body. If an individual were called upon to pay 1000l. to the income-tax, he would probably endeavour to save the whole of it from his income; he would do no more if, in lieu of this war-tax, a loan had been raised, for the interest of which he would have been called upon to pay only 50l. income-tax. The war-taxes, then, are more economical; for when they are paid, an effort is made to save to the amount of the whole expenditure of the war, leaving the national capital undiminished. In the other case, an effort is only made to save to the amount of the interest of such expenditure, and therefore the national capital is diminished in amount. The usual objection made to the payment of the larger tax is, that it could not be conveniently paid by manufacturers and landholders, for they have not large sums of money at their command. We think that great efforts would be made to save the tax out of their income, in which case they could obtain the money from this source; but suppose they could not, what should hinder them from selling a part of their property for money, or of borrowing it at interest? That there are persons disposed to lend, is evident from the facility with which government raises its loans. Withdraw this great borrower from the market, and private borrowers would be readily accommodated. By wise regulations, and good laws, the greatest facilities and security might be afforded to individuals in such transactions. In the case of a loan, A advances the money, and B pays the interest, and every thing else remains as before. In the case of war-taxes, A would still advance the money, and B pay the interest, only with this difference, he would pay it directly to A; now he pays it to government, and government pays it to A.
These large taxes, it may be said, must fall on property, which the smaller taxes now do not exclusively do. Those who are in professions, as well as those who live from salaries and wages, and who now contribute annually to the taxes, could not make a large ready money payment; and they would, therefore, be benefited at the expence of the capitalist and landholder. We believe that they would be very little, if at all benefited by the system of war-taxes. Fees to professional men, salaries, and wages, are regulated by the prices of commodities, and by the relative situation of those who pay, and of those who receive them. A tax of the nature proposed, if it did not disturb prices, would, however, change the relation between these classes, and a new arrangement of fees, salaries, and wages, would take place, so that the usual level would be restored.
The reward that is paid to professors, &c. is regulated, like every thing else, by demand and supply. What produces the supply of men, with certain qualifications, is not any particular sum of money, but a certain relative position in society. If you diminished, by additional taxes, the incomes of landlords and capitalists, leaving the pay of professions the same, the relative position of professions would be raised; an additional number of persons would, therefore, be enticed into those lines, and the competition would reduce the pay.
The greatest advantage that would attend war-taxes would be, the little permanent derangement that they would cause to the industry of the country. The prices of our commodities would not be disturbed by taxation, or if they were, they would only be so during a period when every thing is disturbed by other causes, during war. At the commencement of peace, every thing would be at its natural price again, and no inducement would be afforded to us by the direct effect, and still less by the indirect effect of taxes on various commodities, to desert employments in which we have peculiar skill and facilities, and engage in others in which the same skill and facilities are wanting. In a state of freedom every man naturally engages himself in that employment for which he is best fitted, and the greatest abundance of products is the result. An injudicious tax may induce us to import what we should otherwise have produced at home, or to export what we should otherwise have received from abroad; and in both cases, we shall receive, besides the inconvenience of paying the tax, a less return for a given quantity of our labour, than what that labour would, if unfettered, have produced. Under a complicated system of taxation, it is impossible for the wisest legislature to discover all the effects, direct and indirect, of its taxes; and if it cannot do this, the industry of the country will not be exerted to the greatest advantage. By war-taxes, we should save many millions in the collection of taxes. We might get rid of at least some of the expensive establishments, and the army of officers which they employ would be dispensed with. There would be no charges for the management of debt. Loans would not be raised at the rate of 50l. or 60l. for a nominal capital of 100l., to be repaid at 70l., 80l., or possibly at 100l.; and perhaps, what is of more importance than all these together, we might get rid of those great sources of the demoralization of the people, the customs and excise. In every view of this question, we come to the same conclusion, that it would be a great improvement in our system for ever to get rid of the practice of funding. Let us meet our difficulties as they arise, and keep our estates free from permanent incumbrances, of the weight of which we are never truly sensible, till we are involved in them past remedy.
We are now to compare the other two modes of defraying the expences of a war, one by borrowing the capital expended, and providing annual taxes permanently for the payment of the interest, the other by borrowing the capital expended, and besides providing the interest by annual taxes, raising, by the same mode, an additional revenue (and which is called the sinking fund), with a view, within a certain determinate time, to redeem the original debt, and get rid entirely of the taxes.
Under the firm conviction that nations will at last adopt the plan of defraying their expences, ordinary and extraordinary, at the time they are incurred, we are favourable to every plan which shall soonest redeem us from debt; but then we must be convinced that the plan is effective for the object. This then is the place to examine whether we have, or can have, any security for the due application of the sinking fund to the payment of debt.
When Mr. Pitt, in 1786, established the sinking fund, he was aware of the danger of entrusting it to ministers and parliament; and, therefore, provided that the sums applicable to the sinking fund should be paid by the Exchequer into the hands of commissioners, by quarterly payments, who should be required to invest equal sums of money in the purchase of stock, on four days in each week, or about fifty days in each quarter. The commissioners named were, the Speaker of the House of Commons, the Chancellor of the Exchequer, the Master of the Rolls, the Accountant General of the Court of Chancery, and the Governor and Deputy-Governor of the Bank. He thought, that, under such management, there could be no misapplication of the funds, and he thought correctly, for the commissioners have faithfully fulfilled the trust reposed in them. In proposing the establishment of a sinking fund to Parliament in 1786, Mr. Pitt said, “With regard to preserving the fund to be invariably applied to the diminution of the debt inalienable, it was the essence of his plan to keep that sacred, and most effectually so in time of war. He must contend, that to suffer the fund at any time, or on any pretence, to be diverted from its proper object, would be to ruin, defeat, and overturn his plan. He hoped, therefore, when the bill he should introduce should pass into a law, that House would hold itself solemnly pledged, not to listen to a proposal for its repeal on any pretence whatever.”1
“If this million, to be so applied, is laid out with its growing interest, it will amount to a very great sum in a period that is not very long in the life of an individual, and but an hour in the existence of a great nation; and this will diminish the debt of this country so much, as to prevent the exigencies of war from raising it to the enormous height it has hitherto done. In the period of twenty-eight years, the sum of a million, annually improved, would amount to four millions per annum, but care must be taken that this fund be not broken in upon; this has hitherto been the bane of this country; for if the original sinking fund had been properly preserved, it is easy to be proved that our debts, at this moment, would not have been very burthen-some; this has hitherto been, in vain, endeavoured to be prevented by acts of Parliament; the minister has uniformly, when it suited his convenience, gotten hold of this sum, which ought to have been regarded as most sacred. What then is the way of preventing this? The plan I mean to propose is this, that this sum be vested in certain commissioners, to be by them applied quarterly to buy up stock; by this means, no sum so great will ever be ready to be seized upon on any occasion, and the fund will go on without interruption. Long and very long has this country struggled under its heavy load, without any prospect of being relieved; but it may now look forward to an object upon which the existence of this country depends; it is, therefore, proper it should be fortified as much as possible against alienation. By this manner of paying 250,000l. quarterly into the hands of commissioners, it would make it impossible to take it by stealth; and the advantage would be too well felt ever to suffer a public act for that purpose. A minister could not have the confidence to come to this House, and desire the repeal of so beneficial a law, which tended so directly to relieve the people from burthen.”1
Mr. Pitt flattered himself most strangely, that he had found a remedy for the difficulty which “had hitherto been the bane of this country”; he thought he had discovered means for preventing “ministers, when it suited their convenience, from getting hold of this sum, which ought to be regarded as most sacred.” With the knowledge of Parliament which he had, it is surprising that he should have relied so firmly on the resistance which the House of Commons would offer to any plan of ministers for violating the sinking fund. Ministers have never desired the partial repeal of this law, without obtaining a ready compliance from Parliament.
We have already shown,1 that, in 1807, one Chancellor of the Exchequer proposed to relieve the country from taxation, with a very slight exception, for several years together, while we were, during war, keeping up, if not increasing our expenditure, and supplying it by means of annual loans. What is this but disposing of a fund which ought to have been regarded as most sacred?
In 1809, another Chancellor of the Exchequer raised a loan, without raising any additional taxes to pay the interest of it, but pledged a portion of the war-taxes for that purpose, thereby rendering an addition to that amount, necessary to the loan of the following and every succeeding year. Was not this disposing of the sinking fund by stealth, and accumulating debt at compound interest? Another Chancellor of the Exchequer, in 1813, proposed a partial repeal of the law, by which seven millions per annum of the sinking fund was placed at his disposal, and which he has employed in providing for the interest of new debt. This was done with the sanction of Parliament, and, as we apprehend, in direct violation of all the laws which had before been passed regarding the sinking fund. But what has become of the remainder of this fund, after deducting the seven millions taken from it by the act of 1813? It should now be sixteen millions, and at that amount it was returned in the annual finance accounts last laid before Parliament. The finance committee appointed by the House of Commons2 did not fail to see that nothing can be deemed an efficient fund for the redemption of debt in time of peace, but such as arises from an excess of revenue above expenditure, and as that excess, under the most favourable view, was not quite two millions, they considered that sum as the real efficient sinking fund, which was now applicable to the discharge of debt. If the act of 1802 had been complied with, if the intentions of Mr. Pitt had been fulfilled, we should now have had a clear excess of revenue of above twenty millions, applicable to the payment of the debt; as it is, we have two millions only, and if we ask ministers what has become of the remaining eighteen millions, they show us an expensive peace establishment, which they have no other means of defraying but by drafts on this fund, or several hundred millions of 3 per cents. on which it is employed in discharging the interest. If ministers had not had such an amount of taxes to depend on, would they have ventured, year after year, to encounter a deficiency of revenue below expenditure, for several years together, of more than twelve millions? It is true that the measures of Mr. Pitt locked it up from their immediate seizure, but they knew it was in the hands of the commissioners, and presumed as much upon it, and justly, with the knowledge they had of Parliament, as if it had been in their own. They considered the commissioners as their trustees, accumulating money for their benefit, and of which they knew that they might dispose whenever they should consider that the urgency of the case required it. They seem to have made a tacit agreement with the commissioners, that they should accumulate twelve millions per annum at compound interest, while they themselves accumulated an equal amount of debt, also at compound interest. The facts are indeed no longer denied. In the last session of Parliament, for the first time the delusion was acknowledged by ministers,1 after it had become manifest to every other person; but yet it is avowed to be their intention, to go on with this nominal sinking fund, raising a loan every year for the difference between its real and nominal amount, and letting the commissioners subscribe to it. On what principle this can be done, it would be difficult to give any rational account. Perhaps it may be said, that it would be a breach of faith to the stockholder to take away the sinking fund, but is it not equally a breach of faith if the Government itself sells to the commissioners the greatest part of the stock which they buy? The stockholder wants something substantial and real to be done for him, and not any thing deceitful and delusive. Disguise it as you will, if of fourteen millions to be invested by the commissioners in time of peace, the stock which twelve millions will purchase is sold by the Government itself, which creates it for the very purpose of obtaining these twelve millions, and only stock for two millions is purchased in the market, and no taxes for sinking fund or interest are provided for the twelve millions which Government takes; the result is precisely the same to the stockholder, and to every one concerned, as if the sinking fund was reduced to two millions. It is utterly unworthy of a great country to countenance such pitiful shifts and evasions.
The sinking fund, then, has, instead of diminishing the debt, greatly increased it. The sinking fund has encouraged expenditure. If, during war, a country spends twenty millions per annum, in addition to its ordinary expenditure, and raises taxes only for the interest, it will, in twenty years, accumulate a debt of four hundred millions; and its taxes will increase to twenty millions per annum. If, in addition to the million per annum, taxes of 200,000l. were raised for a sinking fund, and regularly applied to the purchase of stock, the taxes, at the end of twenty years, would be twenty-four millions, and its debt only 342 millions; for fifty-eight millions will have been paid off by the sinking fund; but if, at the end of this period, new debt shall be contracted, and the sinking fund itself, with all its accumulations, amounting to 6,940,000l., be absorbed in the payment of interest on such debt, the whole amount of debt will be 538 millions, exceeding that which would have existed if there had been no sinking fund by 138 millions. If such an additional expenditure were necessary, provision should be made for it without any interference with the sinking fund. If, at the end of the war, there is not a clear surplus of revenue above expenditure of 6,940,000l., on the above supposition, there is no use whatever in persevering in a system which is so little adequate to its object. After all our experience, however, we are again toiling to raise a sinking fund; and, in the last session of Parliament, three millions of new taxes were voted, with the avowed object of raising the remnant of our sinking fund, now reduced to two millions, to five millions.1 Is it rash to prognosticate that this sinking fund will share the fate of all those which have preceded it? Probably it will accumulate for a few years, till we are engaged in some new contest, when ministers, finding it difficult to raise taxes for the interest of loans, will silently encroach on this fund, and we shall be fortunate if, in their next arrangement, we shall be able to preserve out of its wreck an amount so large as two millions.
It is, we think, sufficiently proved, that no securities can be given by ministers that the sinking fund shall be faithfully devoted to the payment of debt, and without such securities we should be much better without such a fund. To pay off the whole, or a great portion of our debt, is, in our estimation, a most desirable object; if, at the same time, we acknowledged the evils of the funding system, and resolutely determined to carry on our future contests without having recourse to it. This cannot, or rather will not, be done by a sinking fund as at present constituted, nor by any other that we can suggest; but if, without raising any fund, the debt were paid by a tax on property, once for all, it would effect its object. Its operation might be completed in two or three years during peace; and, if we mean honestly to discharge the debt, we do not see any other mode of accomplishing it. The objections to this plan are the same as those which we have already attempted to answer1 in speaking of war-taxes. The stockholders being paid off, would have a large mass of property, for which they would be eagerly seeking employment. Manufacturers and landholders would want large sums for their payments into the Exchequer. These two parties would not fail to make an arrangement with each other, by which one party would employ their money, and the other raise it. They might do this by loan, or by sale and purchase, as they might think it most conducive to their respective interests; with this the state would have nothing to do. Thus, by one great effort, we should get rid of one of the most terrible scourges which was ever invented to afflict a nation; and our commerce would be extended without being subject to all the vexatious delays and interruptions which our present artificial system imposes upon it.
There cannot be a greater security for the continuance of peace than the imposing on ministers the necessity of applying to the people for taxes to support a war. Suffer the sinking fund to accumulate during peace to any considerable sum, and very little provocation would induce them to enter into a new contest. They would know that, by a little management, they could make the sinking fund available to the raising of a new supply, instead of being available to the payment of the debt. The argument is now common in the mouths of ministers when they wish to lay on new taxes, for the purpose of creating a new sinking fund, in lieu of one which they have just spent, to say, “It will make foreign countries respect us; they will be afraid to insult or provoke us, when they know that we are possessed of so powerful a resource.” What do they mean by this argument, if the sinking fund be not considered by them as a war fund, on which they can draw in support of the contest? It cannot, at one and the same time, be employed in the annoyance of an enemy, and in the payment of debt. If taxes are, as they ought to be, raised for the expences of a war, what facility will a sinking fund give to the raising of them? none whatever. It is not because the possession of a sinking fund will enable them to raise new and additional taxes that ministers prize it; for they know it will have no such effect; but because they know that they will be enabled to substitute the sinking fund in lieu of taxes, and employ it, as they have always done, in war, and providing interest for fresh debt. Their argument means this, or it means nothing; for a sinking fund does not necessarily add to the wealth and prosperity of a country; and it is on that wealth and prosperity that it must depend whether new burthens can be borne by the people. What did Mr. Vansittart mean in 1813, when he said1 that “the advantage which his new plan of finance would hereafter give, in furnishing 100 millions in time of peace, as a fund against the return of hostilities, was one of great moment. This would place an instrument of force in the hands of parliament which might lead to the most important results.” “It might be objected by some, that, keeping in reserve a large fund to meet the expences of a new war, might be likely to make the government of this country arrogant and ambitious; and therefore have a tendency unnecessarily to plunge us in new contests;”—not a very unreasonable objection, we should think! How does Mr. Vansittart answer it? “On this subject he would say from long experience and observation, that it would be better for our neighbours to depend on the moderation of this country, than for this country to depend on them1 . He should not think the plan objectionable on this account. If the sums treasured up were misapplied by the arrogant or ambitious conduct of our government, the blame must fall on the heads of those who misused it, not on those who put it into their hands for purposes of defence. They did their duty in furnishing the means of preserving the greatness and glory of the country, though those means might be used for the purposes of ambition, rapine, and desolation.” These are very natural observations from the mouth of a minister; but we are of opinion that such a treasure would be more safe in the custody of the people, and that Parliament have something more to do than to furnish ministers with the means of preserving the greatness and glory of the country. It is their duty to take every security that the resources of the country are not misapplied “by the arrogant and ambitious conduct of our government,” or “used for the purposes of ambition, rapine, and desolation.”
If we had no other reason for our opinion, this speech would convince us that, in the present constitution of Parliament, the superintending authority, the sinking fund is pernicious, and that it cannot be too soon abolished.
On the extraordinary assumption that there was any thing in Mr. Vansittart’s plan that would, more effectually than the old plan, allow 100 millions hereafter to be appropriated to the public service, Dr. Hamilton has the following observations:
“We are altogether at a loss to form a distinct conception of the valuable treasure here held forth. So soon as any stock is purchased by the commissioners, and stands invested in their name, a like amount of the public debt is in fact discharged. Whether a Parliamentary declaration to the effect be made or not, is only a matter of form. If the money remain invested in the name of the commissioners, no doubt it may be transferred again to purchasers in the stock exchange, when war broke out anew; and money may be raised for the public in this manner. It is an application to the public to invest their capital in the purchase of this dormant stock.”1 “It is true, that, if the taxes imposed during war, for the purpose of a sinking fund, be continued after peace is restored, till a large sum (suppose 100,000,000l.) be vested in the hands of the Commissioners, the public, upon the renewal of the war, may spend to that amount without imposing fresh taxes[”]2 , [“]an advantage,” observes Mr. Huskisson, “not only not exclusively belonging to this plan, but unavoidable under any plan of a sinking fund in time of peace.”3 Mr. Vansittart ought to have said, “if our sinking fund should accumulate, in time of peace, to so large a sum that I can take five millions per annum from it; I can spend 100,000,000l. in a new war without coming to you for fresh taxes; the disadvantages of my plan are, that by now taking 7,000,000l. per annum from it, and making a provision for speedily, and at regular intervals, appropriating more of this fund to present objects, the sinking fund will be so much diminished, that I cannot so soon, by a great many years, avail myself of the five millions for the purpose which I have stated.”
[1 ]The quotations are from the ‘Third Edition, Enlarged’, Edinburgh, Oliphant, 1818, p. 135 ff.
[1 ]Misprinted ‘unfavourable’; Hamilton says ‘conformable’.
[1 ]p. 216.
[1 ]Hamilton actually says ‘The arrangement of the loans’.
[2 ]p. 214.
[1 ]See Outlines of a Plan of Finance: proposed to be submitted to Parliament, 1813, p. 7; and Vansittart’s speech, 3 March 1813 (Hansard, XXIV, 1086).
[1 ]An Act relating to the Redemption of the National Debt (53 Geo. III. c. 35). The quotations that follow are from the resolutions moved by Vansittart, 3 March 1813, and adopted by the House of Commons, 26 March 1813 (Hansard, XXIV, 1091–3).
[* ]The effect of this clause was to give a sinking fund of 1½ instead of 1 per cent. on such excess of loan above the sinking fund, if the loan were raised in a 3 per cent. stock, and of 2½ per cent. if raised in a 5 per cent. stock.
|Mr. Vansittart’s plan has added to the sinking fund 1 per cent. on a capital of 86,796,300l.||867,963l.|
|On fifty-six millions of Exchequer bills outstanding, 5th January 1818, 1 per cent||560,000|
|By attaching a sinking fund of one-half the interest, instead of 1 per cent. on a part of the capital createdby loans, he has added to the sinking fund||793,348|
|Total added||2,221,311 l.|
|From stock, cancelled and available for public service||7,632,969|
|Total deduction from sinking fund, on 5th January 1819||5,411,658 l.|
On the 3d of February 1819, the Commissioners certified, that there had been transferred to them 378,519,969l. 5s. 3¾d. capital stock, the interest on which was 11,448,564l. 10s. 6¼d., and that the debt created prior to, and by the 37th Geo. III amounted to 348,684,197l. 1s. 5¾d., with a yearly interest of 11,446,736l. 3s. 4¾d.; and, consequently, the excess redeemed was 29,835,772l. 3s. 9¼d., with a yearly interest of 1828l. 7s. 1¼d. Of the above sum of 11,448,564l., 7,632,969l. only has been cancelled.
[1 ]Speech on the New Plan of Finance, 3 March 1813 (Hansard, XXIV, 1088–9). The italics are Ricardo’s.
[1 ]See Tierney’s speech on Vansittart’s New Plan, 3 March 1813 (Hansard, XXIV, 1095–8).
[1 ]See Substance of the Speech of W. Huskisson..., pp. 20–2.
[2 ]pp. 44–58.
[1 ]See Grenfell’s motions respecting the Sinking Fund in 1814 (Hansard, XXVII, 578–82 and 651) and cp. below, V, 4.
[1 ]The clause beginning ‘or even’ is not in Hamilton.
[2 ]Hamilton, p. 206.
[3 ]ib. p. 205.
[1 ]Speech on the New Plan of Finance, 3 March 1813 (Hansard, XXIV, 1083).
[2 ]Speech on a Plan of Finance, 29 Jan. 1807 (Hansard, VIII, 585–7).
[1 ]Traité d’Économie politique, Paris, Deterville, ist ed., 1803; see Bk. I, ch. xxii, ‘Des Débouchés’.
[2 ]Commerce Defended. An Answer to the Arguments by which Mr. Spence, Mr. Cobbett, and Others, have Attempted to Prove that Commerce is not a Source of National Wealth, by James Mill, London, Baldwin, 1808.
[1 ]Lord Henry Petty, quoted above, p. 176.
[1 ]Above, pp. 175–7.
[1 ]In the debate on his own Plan for the Reduction of the National Debt, 29 March 1786 (Hansard’s Parliamentary History, XXV, 1321–2).
[1 ]ib. 1309. The italics are Ricardo’s.
[1 ]Above, pp. 154–5.
[2 ]In their ‘First Report’, 1819 (reprinted in Hansard, Appendix to vol. XL).
[1 ]The acknowledgement was implied in the proposal of the Budget of 1819 to borrow £12,000,000 from the Sinking Fund for the service of the year; see below, V, 20.
[1 ]See below, V, 20.
[1 ]Above, pp. 186–90.
[1 ]In the debate on the state of the finances of Great Britain, 25 March 1813 (Hansard, XXV, 333–4).
[1 ]‘theirs’ in Hansard.
[1 ]p. 233.
[2 ]This part of the quotation is from Hamilton, pp. 234–5, not from Huskisson.
[3 ]Substance of the Speech of W. Huskisson...25 March 1813, p. 40.
See Substance of the Speech of W. Huskisson..., London, Murray, 1813, pp. 29–30.
On the State of the Public Revenue and Expenditure, in The Speeches of William Pitt, London, 1806, vol. ii, pp. 36–7.