Apology for sinking-funds;

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II

Dr. Price's rTlHIS notion of borrowing at simple principle: j_ interest, and accumulating a fund

called Utopian, at compound interest, was preached by Dr. Price and accepted by Mr. Pitt and his friends : though it was no new discovery, "it was reproduced as a sure mode of relieving the nation from the load of debt by which it was oppressed. At the present day, the expectation of relief by such means is regarded as of no more value than the expectation of the indefinite perfectibility of man, and the consequent cessation hereafter of pain and death. Price's "Reversionary Annuities," and Godwin's "Political Justice," are put side by side on the Utopian shelf. Tried lij I have shown that the reduction of

private case, my debt on the estate is effected by no trick of figures, but by saving from my income. But let us see whether this is the whole truth.

Let us say that on succeeding to my estate, I at once set aside for 28 years £4,000 a year ; of which £3,000. goes to pay the annual interest, and £1 ,000 is invested at 5 per cent, compound interest, and therefore amounts at the end of about 14 years to £20,000, and at the end of about 28 years to £60,000. If I had discharged no principal, I should have paid £3,000 annually during the 28 years ; and therefore my additional payment has been £1,000 a year during 28 years, or £28,000.

Next let us imagine that during the first fourteen years after I had succeeded to my estate, I spent the whole income ; but that at the end of the fourteen years I set aside for the second fourteen years £2,000 a year, besides the £8,000 for interest. By the end of the 28th year I should have given up towards payment of principal, £2,000 a year during 14 years, or £28,000.

On both these suppositions I have made the same sacrifice of income, viz., £28,000 : the only difference being that in the former case I have sacrificed £1,000 in each of the 28 years, and that in the latter case I have sacrificed £2,000 in each of the latter 14 years.

But though the sacrifices are the same the results are different.

I Have Accumulated : At the end of 14 years,

At the end of 28 years.

In the 1st. Case : r 14 years at £1,000 ■)

1 Compound Interest f C £20,000. ;

/• 28 years at £1,000 ) Compound Interest 1 +

In the 2nd Case :

Nothing.

r 14 years at £2,000

J Compound Interest (. £40,000.

In the first case I have accumulated £60,000 ; in the second case only £40,000.

This shows how vital an element time is ; it indicates that the date at which the sacrifices are made is of the highest importance ; and if of importance during the life of a man, far more so during the longer life of a nation.

By supposing a larger debt, and carrying on the process some steps further, we shall find striking results.

1st case, extended. I and my successors set aside £1,000 a year for a very long period; still continuing to pay, out of income, interest on the debt.

At the end of 14 years, we have accumulated £20,000

28 „ „ 60,000

42 „ „ 140,000

56 „ „ ...... 260,000

The sacrifices we have made amount to £1,000

2nd case, extended. I and my successors go on during 42 years, spending the whole income left after discharging the annual interest on the debt. At the end of the 42nd year we set aside £4,000 a year as a sinking-fand.

At the end of the 56th year we shall have aocumulated £80,000 Our sacrifices will have been 14 x £4,000 = 56,000

Comparing these two extended cases, the sacrifices in both cases being £56,000, in the former there is an accumulation of £260,000, in the latter only £80,000. So important an element is time Leant posdhle It appears therefore, that the earlier sacrifice. J begin to save, the less will be the

sacrifice required'. To reduce the sacrifice to the lowest possible point, I should, on succeeding to the estate, apply the greater part of the income to constitute a fund. Say that during the two first years, out of the two years' income, I set aside £16,000. After the end of the second year, I should only have to pay £3,000, the interest on the debt, just as if I had not constituted any fund. All my sacrifice will have been £15,000. If we imagine that my successors leave this fund to grow, they will find that at the end of 58 years after I first came into possession, the fund amounts to £240,000.

But we found before that £1,000 a year for 56 years amounts to little more, viz., £260,000, and this with the sacrifice of £56,000, or nearly four times as much.

The prmcijjle. The principle therefore, is indisputable : begin your fund as early as possible ; and thus take full advantage of the accumulation by compound iuterest.

Suppose mt I 'W-ill now take a different case, as a

laiid, but means of estimating the force of an

nwney, objection commonly made. Instead of land, let it be £200,000 in personalty that has been bequeathed to me.

m a btismess Say further, that this consists of

capital engaged in a manufacturing business yielding 10 per cent, on the capital employed : the debt of £60,000 being a mortgage on the factory and land.

inca/paUe of If the business is incapable of judicious

exteiidon extension, I may wisely appropriate part

of the two first years' profits to form a fund, as in the case of the estate ; and if my sons and grandsons leave that fund to grow at 5 per cent., they wUl find, at the end of 58 years, that it amounts to . £240,000 ; all obtained at the trifling sacrifice on my part of the gratifications purchasable with £15,000.

or capable of But what if the business is capable extension. of judicious extension ? What if the

£15,000, invested in new buildings and machinery and stock, would yield me the same 10 per cent, that I obtain on my other capital ? In that case I should get a far larger money advantage by so investing it, than by forming a sinking fund with it. Even if I got only 6 per cent, by such a business investment, I should lose by applying the £16,000 to a fund at 5 per cent. It might, even then, be more prudent to form the fund ; but it would not be more profitable.

Distinotion, Even in the case of the land, if I

Capital, and couM use the £15,000 in draining and Self-mainte- building, SO as to get 5 per cent, upon nance, ^^^ j gj^Q^j^j ^^^^ nothing by forming a

fund with it ; if my gain upon it would be 6 per cent., I should lose by forming such a fund.

But in all my previous remarks, I have assumed that the fund is formed by saving from personal expenditure, and not by applying sums which would otherwise be used as capital : I have assumed that instead of spending £7,000 a year on housekeeping, and hunters, and travelling, I have spent only £6,000 a year ; or that instead of beginning such expenditure immediately on succeeding to the estate, I have deferred the greater part of it for two years. or saving a/nd The distinction between personal exspending. penditure and saving, is at the root of

the question. If I save £1,000 and use that sum productively, I earn an income from it : if I again save that income and use it productively, my income is farther increased ; and if I only get 5 per cent., my first £1,000 becomes in about 14 years, £2,000 : or if I save £1,000 every year, in about 14 years I shall have £20,000. But if in the first year I spend the £1,000 on a well furnished table and men servants and horses, the money is finally gone : there is no accumulation : the expenditure may be a wise one ; but it causes no increase of any kind. If I save this £1,000 each year and put it out to 5 per cent, interest, at the end of about 14 years I possess £20,000 ; if I spend the j^l,000 each year, at the end of the 14 years I have nothing but the memory of past pleasures.

Debt cannot be paid without self-denial : but if self-denial be exercised, it matters not whether the result of it goes to form a separate fund, or is laid out as capital at an equal rate of profit.

We shall see, in the same way, that a national sinking-fund ought to be formed by taxation, and by such taxation as will cause a diminished expenditure on the part oT the people.

III

Evils of T)UT why should we not borrow ? It

lorroiviwj. _D is conceded tliat, individually, we ought not to borrow unless we are compelled to do so, or unless we propose to use the loan as a capital. But why should we not individually borrow to supply our current expenditure ? 1st. When we spend only the income we

work for, or what our property furnishes, we have a natural limit to our outlay ; but " borrowing dulls the edge of husbandry."

2nd. Even if our habit of expense be not

increased, as in the case where a man borrows to buy books or pictures, and fills his shelves or his walls, yet we are left with a debt which we have to repay. We have first enjoyed the pleasure of acquiring, and afterwards we have to deny ourselves other and accustomed pleasures. 3n?, payinrj But besides these evils there is a third

repeatedly. and a formidable one : that on which Dr. Price insists with great energy. Among the Hebrews of old, a lender could only reclaim from one of his nation the sum he had lent : among the Mahometans also, interest is forbidden. Among Christian nations, the taking of a reasonable interest is just as reputable a practice as the taking a price for a house or for a load of wheat. Not only have I to return the £1 ,000 I borrowed, but I have further to pay £50 a year for the use of it : so that, at the end of 20 years, if I have allowed the debt to stand so long, I shall have paid £1,000 for interest, and shall still owe the original sum. Applied to a Great Britain has paid the interest on

nation. its debt with punctuality ; ' but how vast lias been the amount ! Calling our average payment since 1815, 30 millions £ a year, we shall have paid altogether in 53 years, no less than 1,590 millions £ : nearly twice over what we owed in 1815. Our debt is now 800 millions £ ; and at an average interest of 24 millions £ a year, we shall pay the 800 millions £ in about .24 years, and shall still owe our present debt. This is the frightful evil against which Dr. Price lifted up his voice. TtBo principles. We have now arrived therefore, at two principles : 1st, that the fund should be commenced as early as possible, in order to get the advantage of compound interest ; 2ndly, that it should be formed of such savings from expenditure as would. not be otherwise used as capital. DisUndioii: It should be observed here however,

individiud and that my reasonings so far have reference nahon. principally to a private estate : I propose

to show afterwards that the case of a nation is in one respect different ; that though we think of the nation as a unit, it really consists of millions of persons, and of various classes ; and that these persons and classes may be differently affected by the modes of national saving.

Wisdom in JFew persons would dispute the wisdom

indimdual. of my supposed conduct, on my imaginary succession to a burdened estate. It may seem obvious too, that a nation loaded with debt would act with equal prudence in creating a sinking-fund. WJiij not in How is it then, that little is done,

7iation ? and that little by annuities and other

stealthy means ? If in any budget, during peace, the national expenditure were shown to exceed the income, the Chancellor of the Exchequer would have to give place to a successor : even during war the people w'ould rather submit to a large income-tax than resort principally to loans ; witness the fourteen and sixteen pence in the pound, of the Crimean War.

Puhlic We shrink from contracting debt : we

indifferenoe. decline all formal means of discharging it. Sir G. 0. Lewis made an effort ; but in vain : Mr. Gladstone has made several efforts ; but with little success.

Example, the Last year Mr. Gladstone proposed a " Spectator." scheme, too complex to be understood by many persons, but approved by competent judges and by a hostile successor, by which, at a moderate annual charge, a considerable amount of debt would be extinguished in the present generation. Now there is no more thoughtful journal than the Spectator ; no journal which a reader may rely upon with more safety. The editor of that paper spoke, I believe, the sentiments of reflective and highminded men, when he slighted this scheme of Mr. Gladstone's.

Casual remarli. We Can often judge better of a man's sentiments from what comes out indirectly, than from his reasonings when he is on his guard. It is a casual expression of the Spectator on which I rely. The paragraph has reference to furnishing the army with breech-loading rifles : " We are spending fifteen millions a year upon the army, and then the bureaus are agitated because we spend a million, once for all, to make that army efficient. Let General Peel take the million, if necessary, which was to have gone to the National Debt, but let him get the work done, done quickly and done well, and the country will support him."

Shows the I do not dispute the importance of pro -

indifference. viding the army with efficient weapons : I grant that the cheapest of all warlike proceedings is to keep our forces in sucli a state of efl&ciency, as to warn off trespassers from the soil of England : if the cost were, not one million, but twenty, I should not grudge it. But why should the Sjjedator fix on the particular million in question, when a penny in the pound added to the income-tax would be more than sufficient ? Evidently because in his eyes, all sinking-funds, however unassailable logically, are of no real value : because those funds, established again and again in England and France, have ended in nothing. He can admire the discharge of debt in the United States, and the vast project of discharging it all within a generation ; but the very name of an English sinking-fund carries his mind to Utopia. Such, I believe, are the sentiments of most educated men.

Statistical So- A confirmation of this fact is found in ciety neglects, the transactions of the Statistical Society; which is carried on principally by men who are the first to recognise the value of such a proceeding as a sinking-fund : by leading actuaries, secretaries of insurance companies, permanent heads of Government offices, with a few amateurs. Now in the Statistical Journal, there are abundant papers on Mortality, Crime, Education, Taxation, Wages, and Indian Affairs, but scarcely anything about payment of the National Debt.

Why is the It is easy to understand why the

public indif- public has no affection for a sinkingferent ? fund, which means, in the first instance,

increased taxation : when we are told in Parliament and in the newspapers, that all such efforts have failed, and in the nature of things will fail, we inevitably draw back from useless increased taxation : we have come to regard all such projects as means for drawing money out of our pockets under false pretences.

IV. 7ir7 41 T BT US now see the arpfuments on

Why are the I -,.1,1 -, -, p ■ ■ i

leaders of JJ whicli the leaders 01 opinion nave opinion indis- relied. Mr. McCnllocli was lately reposed ? garded as a high, authority, and he thus stated his opinion.*

McCulloch. '' For upwards of twenty years this

pitiful juggle was kept up ; Parliament and the nation believing, notwithstanding the most decisive experience to the contrary, that it was rapidly diminishing the public debt ! Dr. Hamilton, of Aberdeen, had the merit of dissipating this delusion, the grossest, certainly, that ever imposed on any people. He showed, in his work on the National Debt, published in 1813, that the sinking-fand, instead of diminishing, had really added to the debt ; and he proved to demonstration, that the excess of revenue above expenditure is the only sinking-fand by which any part of the National Debt can ever be discharged."

But Hamilton, That the latter part of this statement himself. is true I do not dispute : debt can be

paid only by saving in the first instance ; though, as I have shown in the case of a private person, the time when the saving is effected is a matter of the highest importance. As to the former part of the sentence, let Dr. Hamilton speak for himself, t

" In regard to increase of taxes, we are of opinion that the sinking-fund has had a real effect in calling forth exertions, which, although they might have been made as well and as effectually, would not have

* McCuUocli's "Adam Smith." Ib39, 618. f Hamilton's "Inquiry as to the National Debt.'' 1813, 153.

been made, unless to follow out the line wliich that system required. A loan is made, and the revenue considered as charged, not only with the interest, but a certain proportion of the principal, annually. Taxes are imposed to meet the one as well as the other. If the sinking-fund had not been in view, it is likely taxes would have been imposed for the interest only.

" If the sinking-fand could be conducted without loss to the public, or even if it were attended with a moderate loss, 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.

" But if the loss attending the sinking-fund be great (and the foregoing computation evinces that it has been so) it seems proper to inquire whether a plan might be followed that would deliver us from this loss, and at the same time carry on the necessary measure of increased taxation. The present proportion of one per cent, on the nominal capital might be continued ; not, perhaps, as the most ehgible, but as possessing the advantage of being established. If a loan of 20 millions be transacted in the Three per Cents., the sinking-fund attached to it, on the present system, is £333,333. Now taxes may be imposed to that extent, besides what are required for interest ; and that sum, instead of being made over to commissioners, may, be deducted °fi:-om the loans. Thus, the nation would save the loss it at present sustains, of borrowing on lower, and paying on higher terms ; the imposition of £333,333 additional taxes, which is the only measure of real eflSciency, would be the same as before."

Hamilton s Before comparing these statements

appcwent made by McCuUocli and Hamilton, I

contradiction, ^j^ explain an apparent contradiction. Hamilton was unwilling to give up the actual system of taxation in connection with tlie sinking-fund ; and only recommended the abandonment of the Commission because it caused a loss to the public. But if it caused a loss, why was he unwilling to abandon it ?

Illustrated hy A recent financial operation will explain a recent this. A few years ago, Mr. Gladstone,

proceeding. ^g Chancellor of the Exchequer, wanting to borrow a considerable sum, and being unwilling to permanently increase the debt, proposed to grant terminable annuities, instead of the ordinary perpetual annuities. Mr. Hubbard afterwards calculated the result, and explained to the House of Commons, that this was an improvident measure : that in borrowing on terminable annuities, the country paid a higher rate of interest than in adding to the Three per Cents. Mr. Gladstone had not pretended that he borrowed at a lower rate on terminable annuities : what he proposed was to secure a sinking-fund ; and whether, knowing the loss, he would repeat such a proposal, is another question.

Now, Mr. Hubbard, in showing that this loan on terminable annuities was borrowed at a high rate, did not express any opinion of the propriety of establishing a sinking-fund : he only complained of the loss occasioned by this mode of borrowing. A friend to sinking-funds might join with an enemy to them, in denouncing the improvidence of this particular loan. The friend to sinking-funds might say to Mr. Gladstone : I quite approve of your arranging for the extinction of this debt, by a sinking-fand ; but I object to your scheme of terminable annuities.

because this is a dear way of doing it ; because by doing it directly you would do it at less cost, and because therefore, your mode causes a loss to the public.

Hamilton's This was exactly Hamilton's meaning.

real meaning. He approved of the sinking-fund : he conceded that its existence led to increased taxation ; but he maintained that its actual form was not the best ; and as in another form it would be carried on far more cheaply, he pronounced that the actual operations caused a loss to the public. Sis recommen- Hamflton did not recommend that the dation. sinking-fund should be abandoned. He

said that it had produced a real effect in calling forth exertions which would not otherwise have been made ; and that if the country should abandon the rule, on each fresh loan, of adding to the taxation specifically for the sinking-fund, " our measures of taxation might become entirely loose." What he did recommend was this : — that the separate establishment of sinking-fund commissioners and their accounts, should be abolished ; and that the additional sums previously raised by taxation, should still be raised, and should be at once deducted from the loans.

In timie of wajr. It must be remembered that he wrote during the war, and towards the close of that interminable war which made loans inevitable and immense. Yet even under these most adverse circumstances, he still advised that the sinking-fund should be continued, but in a different form : just as Mr. Hubbard might advise Mr. Gladstone, not to abandon the project of diminishing the National Debt, but to efiect it directly, instead of indirectly. MoGulloch's We can now estimate the value of

error. Mr. McCulloch's censures : he said that tKe sinking-fund was a " pitiful juggle ; " that it was a " delusion, the grossest, certainly, that ever imposed on any people : " and that Dr. Hamilton had the merit of dissipating that delusion, by proving that the sinking-fund, " instead of diminishing, had really added to the debt." Dr. Hamilton, as I have shown, did not regard the sinking-fund as a pitiful juggle, or a delusion : he did not contend that it had added to the debt : he did not recommend its abolition. He held, on the contrary, that the sinking-fund had caused increased taxation and a diminution of debt : he only proved that the form was not the best possible, and that by a change of that form the diminution of debt would be more effectually carried out : he recommended that the sums obtained as a sinking-fand, instead of being invested in the hands of commissioners, should be deducted from loans raised. Lord Oi-emville Mr. McCulloch cannot have troubled 011 Hamilton, himself to read Dr. Hamilton : he must have known him only at second-hand. Now Lord Grenville who has the credit of giving the fatal blow to the system, did know what Dr. Hamilton recommended, and did express his own disagreement.*

" With respect to the distinguished writer whom I have named, there are not a few of the topics on which I have most dwelt, as well as some others which I have not had occasion so particularly to notice in this essay, respecting which his opinons, if I rightly apprehend them, differ, I regret to say it, very much from mine."

When we find such carelessness in a laborious compiler of statistical works, we cannot be surprised at misapprehension on the part of men generally. A recent debate in the House of Commons, famishes examples.

* 2nd Edition. 1828, vii. viii.

V

Souse of Com. QN" the 4th April, 1867, Mr. DisraeH mons debate, ^ brought forward his budget, and

trnt^on's F ^^^V^^^ in it Mr. Gladstone's plan of the '""■■• previous year, for getting rid of a considerable amount of debt. The discussion that followed well exhibits the ordinary sentiments of educated men,

SirG.Bmmjer, Sir George Bowyer, though he has written a good deal, and though he is a distinguished defender of the faith he has adopted, has probably not paid any particular attention to financial topics ; and therefore fairly represents the predominant notions of highly educated men, few of whom, in England, do turn their attention to finance, unless compelled by the necessities of politics. condemned it. Sir George* objected to the plan for the reduction of the National Debt, as he had objected to it in 1866. " The plan was nothing more than that of a sinldng-fund. When the £24,000,000 was wiped off at the end of 18 years, there would be a surplus created of something more than £1,500,000, but we had got very nearly that now, so that the thing was as broad as it was long. As to our public credit, he thought that if we had to go into the market, we should have a better chance of making good terms if we could say that we had a million surplus, than we should have if we told borrowers that, at the end of 18 years, £24,000,000 of our

National Debt would be extinguished

In the event of a war breaking out, the Chancellor of the Exchequer would not be able to borrow

* Times, 5th April, 1867 ; p. 6, col. 6.

money more advantageously than if these prospective reductions had not been determined on ; but, on the contrary, he would then have reason to regret that he had pledged himself to this increased annuity. Indeed the scheme was worse than the old sinking-fund, which might be given up at any time, and the surplus revenue taken. In the present instance, however, a pledge was made to give up the surplus revenue for 18 years, and even if a war broke out, the arrangement could not be changed."

The leading idea in these remarks is, I believe, that the old sinking-fund was, beyond all question, bad ; and that not in form only, but even in substance. The scheme now on foot is condemned, first, because it is nothing more than a sinking-fund ; and secondly, because it is worse even than the old sinking-fund.

Mr. Huhhm-d. Mr. Hubbard followed, and also condemned the proposed plan. His career as a London merchant and bank director, has so far modified his opinions, that he refrained from absolutely condemning an attempt to. diminish the debt : but he showed the faintness of his desire [to do it, by declaring that so long as the duty on fire insurances is not again considerably reduced, the reduction of the National Debt ought to be postponed. As Uclitor of I showed before that the Spectator " Spectator." suggested the re-arming our forces at the expense of this proposed fund : Mr. Hubbard would reduce the fire insurance duty at the expense of the proposed fund : a penny in the pound added to the income-tax would accomplish both purposes. The Spectator and Mr. Hubbard agree in estimating at a very low rate the duty of reducing the National Debt. Mr. Laimg. I am more surprised to see the same

side taken by Mr. Laing ; whose course of life as a distinguislied mathematician, railway chairman, and Indian finance minister, should have set him free from ordinary prejudices. In the debate of the 4th April, he suggested a postponement for further consideration ; though a year's previous postponement would seem enough for any man. But his subsequent remarks showed his real disinclination to all sinking-fands. He said that the nation, hke an individual landowner, "might adopt either of two principles. It might either better its condition by paying off the National Debt by instalments ; or, continuing the payment of interest, it might apply aU surplus revenues to the improvement of the estate Por a long series of years the latter principle had been the one pursued. In the words used by the late Lord Sydenham, then Mr. Powlett Thomson, ' the money was left to fructify in the pockets of the people.' "

Did it not occur to Mr. Laing that there were not two, but three ways of applying a certain individual revenue ? First, it might be applied to pay off a part of the principal of the national debt : secondly, as Mr. Laing says, it might be saved by the owner, and capitalized : thirdly, it might be. finally spent by the owner. Mr. Laing assumes that the money left in the taxpayer's pocket, will be saved, and used productively. But he should remember that far the greater part of men's incomes is spent. Even during the late prosperity, before the commercial crash of 1866, it was calculated that out of an aggregate income of 600 or 700 milhons, the saving was only 130 or 150 millions ; and this was regarded as an immense amoimt. In the same proportion, if it were proposed to levy a million a year for a sinking-fund, and instead of this the million was left to fructify in the people's pockets, the accumulation would be, not a million, but only one-fifth of that sum.