Plans for the Redemption of the Debt.

Having given a general illustration of the nature of the Funds, and of the progress and present amount of the Debt, our next object will be shortly to notice the empyrical projects set on foot and countenanced by the Aristocracy for its redemption.

Although the Sinking Fund, established under the auspices of Mr. Pitt, was founded on an egregious misapprehension, yet, if we examine the subject attentively, we shall find that ministers had similar reasons for adhering to it that they had for adhering to any other branch of expenditure. First, the keeping up of a Sinking Fund was a pretext for keeping up taxation. Secondly, the management of the fund was a pretext for keeping up a certain amount of patronage, fees, and emoluments. Lastly, the Sinking Fund left a surplus sum at the disposal of ministers, ready to be applied to any casual object they might think expedient. They might employ it to subsidize foreign despots, to enter on new wars, or to supply deficiencies in the civil list, or any other department of expenditure. That the money was voted for other purposes formed no security that it would not be so applied; experience having shewn that ministers never hesitated to encroach on the Sinking Fund when it suited their necessities.

These, we apprehend, formed some of the reasons for maintaining the Sinking Fund, long after its fallacy had been demonstrated. Some reluctance, too, was no doubt felt to abandon a scheme of finance which had been panegyrized by many distinguished individuals; and, in fact, the history of the Sinking Fund is the most striking proof of the gullibility of our “great men,” that can any where be found; and it is chiefly for the purpose of illustrating the superlative abilities of hereditary legislators, that we are induced to devote any space to the exposition of such a barefaced subject.

Mr. Pitt’s plan of a Sinking Fund was, to set apart a portion of the surplus revenue, to accumulate by compound interest, and, after the expiration of a certain period, to apply the aggregate amount of interest and principal to the liquidation of the debt. To show the fallacy of this scheme, it will be necessary to premise a few explanations on the nature of interest.

Interest is of two kinds, either simple or compound; simple interest is that which is allowed for the use of the principal only; compound interest, called also interest on interest, is that which is allowed for the use of both principal and interest taken together. If money be lent at simple interest, suppose five per cent. per annum, it will double itself in twenty years; that is, if the interest be forborn that time, it will equal the principal. If money be laid out at compound interest, on the same terms, it will double itself in little more than fourteen years; so that the different rate at which money increases by simple and compound interest is very considerable. To illustrate this by an example, we will suppose £100 lent at five per cent. compound interest, for one hundred years. At the expiration of the first founteen years (omitting the fraction of a year) it would amount to £200; at the expiration of the second fourteen years to £400; at the expiration of the third fourteen years to £800; and so on, doubling itself at the expiration of every fourteen years, till, at the expiration of the one hundred years, it would have increased to the sum of £14,112; while, had the same money been put out at simple interest, it would have amounted only to £600; £500 being the interest of £100 for one hundred years, at five per cent. per annum.

Now, it is on this power of money to accumulate, at compound interest, that the Sinking Fund was established. Dr. Price, an expert arithmetician, calculated that a penny, or a farthing, we forget which, laid out at compound interest at the birth of Christ, would, at the time he wrote, have accumulated to several globes of gold, each globe as large as the earth. This was really prodigious; and the Doctor was so pleased with the result, that he thence conceived the idea of redeeming the national debt. He thought that if a sum of money, no matter how small, could only be once laid out at compound interest, it would, in a century or so, amount to a sum equal to the debt itself, and by means of which the debt might be discharged. All the Doctor wanted was time; money he did not want, except a farthing or a penny to begin with. Nothing could be more alluring; to pay off the debt by so small a sum as one penny, seemed, next to a sponge, the cheapest way imaginable.

Doctor Price communicated his scheme to Mr. Pitt, who appears to have been as much captivated as the Doctor with the discovery. This was in 1786; a time favourable for the experiment, the country being at peace with all the world, commerce and agriculture just recovering from the depression of the American contest, and, what was more, there was a surplus revenue of nearly a million to begin with. This sum, it was resolved, should be set apart to “fructify” by the miraculous powers of compound interest, agreeably to Dr. Price’s calculations. Commissioners were appointed to take charge of the sacred deposit, which, on no pretext, was to be violated: and thus did the Sinking Fund, which, like little David, was to bring down the Goliah of the debt, commence.

All at once, however, the people were seized with a strange panic; from entertaining the most gloomy apprehensions that the debt would never be paid, they began to fear it would be paid too soon; the globes of gold had so bewildered the public mind, that it was apprehended, from the sudden payment of the debt, the country would be overwhelmed with money and unemployed capital. To avert so dire a calamity, Mr. Pitt announced his intention to pay off £4,000,000, annually, and no more. Here the subject rested for some years, and we must beg leave to rest also. Having stated fairly the principle of the Sinking Fund, we must now expose its fallacy as applicable to the reduction of the debt. It is due, however, to Dr. Price to observe that there was nothing wrong in his principles, that the effect of compound interest was correctly as he had calculated, and that he was only wrong, like many other well-meaning theorists, in his application of them.

The first objection to the scheme of Dr. Price was the length of time that must elapse before it attained its object. Any plan for the reduction of the debt, founded on an adherence to a particular system of finance, the continuance of a certain amount of taxation, or the duration of peace, was hardly likely to be realized in practice. These were all liable to change; yet a permanency in them was necessary to complete the original plan of the Sinking Fund. The sum set apart was on no pretext to be violated; war might arise demanding additional sacrifices, the ability of the country to support taxation might decrease, or there might arise new chancellors of the exchequer with new schemes of finance, yet none of these were to interfere with the fund. That a plan depending on such contingencies should be realized appears highly improbable.

Waving, however, the objection as to time, we will suppose the plan in actual operation; we will suppose a million set apart to accumulate by compound interest, till it equal in amount the debt it is intended to liquidate. Now, it is obvious, if the debt be very large, the Sinking Fund must be very large also; but, supposing the debt amounts to 800 millions, one cannot conceive how any Sinking Fund, long before it equals in amount the debt it is intended to discharge, can be employed, or in whose hands it can be invested. Suppose the fund amounts only to 200 millions, how can any government employ such a sum? To whom are they to lend it? If they lend it to individuals they will want security, not only for the interest but the principal. But the only adequate security would be land; commercial security would hardly be satisfactory; and, it is obvious, if landed security alone be accepted, the advance of 200 millions would make government the mortgagees of nearly all the land in the kingdom. Such a state of things is chimerical, and, consequently, any Sinking Fund founded upon it must be chimerical also.

Instead of reducing the debt in this way, it is easy to conceive another far more economical and equally efficacious. Suppose the money forming the fund had not been raised in taxes, but left in the hands of the people to be employed in trade and manufactures; then suppose, at the expiration of a certain time, a sum is levied in taxes equal in amount to what the Fund would have attained; it is obvious, on this supposition, the debt would be equally reduced; but, in this case, there would be no Sinking Fund,—no commissioners,—no drawing money in shape of taxes, and returning it again in shape of loan;—in a word, there would be no delusion.

Though the principle here illustrated is that on which the Sinking Fund was founded, it is not that according to which it has been conducted. The money forming the fund has never, in fact, been lent to individuals, but employed in the purchase of stock at the market-price. The interest of stock so purchased has been added to the fund, and the total employed in the purchase of more stock; so that, by continually adding the interest of the debt redeemed to the principal of the fund, the effect has been the same as money accumulating at compound interest. If we compare this mode of employing a Sinking Fund with the former, we shall find that, if the first was chimerical, the second was useless, serving no object further than entailing an unnecessary expense on the public for management.

Suppose at the end of the year there is a surplus revenue of one million in the Exchequer; then, agreeably to the system pursued by our statesmen for many years, this million is paid to commissioners, who employ it in the purchase of stock, the stock so purchased and interest forming together the Sinking Fund. But, instead of the million being vested in Commissioners, suppose it is employed by the Chancellor of the Exchequer in the purchase of stock, where, it may be asked, would be the difference? In both cases the same amount of debt is redeemed, and the interest of the redeemed debt, being laid out in the purchase of more stock, accumulates in a compound ratio.

It is in the latter way the Americans have managed the reduction of their debt; and by which they have almost effected its extinction. When there is a surplus in the treasury, after defraying the charges of government, it is applied directly to pay off such portions of the debt as have been advertised to be paid off, and on which the interest afterwards ceases to be paid. Indeed, the principle is so plain that it is astonishing how it can ever have been misapprehended. It is obvious to the meanest capacity that, if a sum of money be owing, on which interest is payable, the gain is equal, whether we pay a part of our debt, or lend, to a third person, a sum of equal amount. Government, however, acted as if there were some substantive difference in the two cases, and they were supported for years in the egregious blunder by the “Collective Wisdom of the nation.”

We have not yet conducted the reader to the chief absurdity in the Sinking Fund. We have been all along supposing an actual surplus revenue, and considering the most advantageous mode of employing this surplus; but the fact is, there never was any such surplus, except during the first few years after the establishment of the fund. Every year government incurred debt, and this debt it attempted to pay by borrowed money; that is, it borrowed money of A to pay B, and in this consisted the grand bubble of the Sinking Fund.

The late Professor Hamilton was the first writer who exposed the delusion of the Sinking Fund, and showed incontrovertibly that it was by the application of a surplus income only that the debt could be reduced. By persisting in the financial error we have endeavoured to explain, an enormous expense was incurred in the charges of management, and this was not the extent of the evil. The Sinking Fund was a principal cause of the augmentation of the debt. So enormous was the blunder, that no one felt any concern about the increase of this national incumbrance; whatever might be the amount, it was conceived the Fund would be adequate to its redemption. Hence public credit became as unlimited as public credulity. Men, in other respects enlightened, were deceived, and it would be easy to cite, from the speeches of distinguished living statesmen, the most extravagant encomiums of this great fiscal deception. But the subject has ceased to be of intense interest, and is chiefly valuable as an additional testimony of those epidemic aberrations to which human nature, in all ages, has been exposed. Even Lord Grenville has lived to discover and acknowledge he was deceived by the Sinking Fund; and this appears not the only error of the Pitt system, of which his lordship appears likely to survive the refutation.

We have still left the more lamentable part of the business unnoticed; the public has not only incurred a great loss from the charge of managing the Sinking Fund, but also from the additional sums borrowed for its maintenance.

In every loan the contractors have a profit at the expense of the public, and the greater the loan the greater their gain, and consequently the public loss. From 1793 the Sinking Fund was supported by borrowed money; besides the loan for the public service, an additional sum was raised for the Fund. Had there been no such Fund, the annual loans would have been less by the amount of the sum paid to the commissioners for the redemption of the Debt. The question then is, supposing the sum borrowed for the Fund, since 1793, be 250 millions, how much has the public lost by the operation?

Professor Hamilton answered this question. He ascertained the total loss to the public, by annually borrowing additional loans to support the delusion of the Fund, at thirty millions. The interest of thirty millions, at five per cent. per annum, is a million and a half. A million and a half then is the gain of the loan-contractors, and the annual loss entailed on the country by the farce of a Sinking Fund.

A question may be here asked,—If we had had no Sinking Fund, in what way were we to look forward to the redemption of the Debt? Our opinion is that, in case of a surplus revenue, it ought to have been applied to the purchase of stock at the market price, and a portion of the Debt cancelled equal to the amount of stock purchased. But we are not much in favour of government having a surplus revenue to dispose of, but think it better that taxes should be remitted to the amount of the surplus; or, in case the times are favorable to an effort for the reduction of the Debt, that it should be made by a direct assessment on the community expressly for the purpose. The advocates of a surplus revenue think it tends to support public credit; but the surest mode of supporting public credit is to contribute, in all possible ways, to promote public prosperity. Public credit obviously depends on the abundance of public wealth; in other words, on the ability of the community to support the burthens necessary to pay the interest, or ultimately the principal of the debt; and this ability is augmented, not by taking money from the people, but by leaving it in their pockets: it is not by tying up capital in a sort of mortmain, in the hands of government commissioners, that national wealth is amassed, but by leaving it to be employed in the extension of commerce, manufactures, and agriculture. Every shilling levied in taxes takes from productive capital, thereby impoverishing the country, and lessening the security of the public creditor.

In short, we trust the people have learnt wisdom by experience, and they see the policy of keeping every administration in a kind of strait waistcoat, neither suffering them to have a surplus revenue, nor surplus military force, nor surplus power of any kind, beyond the current exigencies of the state, at their disposal. Without this precaution, the country is sure to be drawn into some wanton and profligate crusade. All governments are prone to war, because it augments patronage and emolument, and gratifies pride, insolence, and ambition. If we have not been involved in hostilities ere this, it has been more owing to the protecting Ægis of our pecuniary embarrassments than the absence of inclination in our rulers. Can it be supposed we should not have been embroiled about Portugal, Turkey, France, Italy, or Belgium, had not the Exchequer been empty? A surplus revenue, however, under the pretext of a Sinking Fund, at all times supplies the needful, and it is easy to foresee, from past experience, were such a fund tolerated, it would be dissipated in domestic profusion or foreign aggression. As to really applying the fund to the redemption of the debt, it is mere delusion: the Oligarchy, notwithstanding the solemn ejaculations of many of them about preserving, inviolate, public faith, have got a more efficient receipt for reducing the Debt than paying it off, as soon as the necessities of their unprincipled system demand the application.