ESSAY

ON

THE FUNDING SYSTEM.

UNDER this head we propose, first, to give an account of the rise, progress, and modifications of the SINKING FUND, accompanied with some observations as to the probability of its accomplishing the object for which it was instituted; and next, briefly to consider the best mode of providing for our annual expenditure both in war and peace,-an inquiry necessarily involving the policy of that SYSTEM OF FUNDING of which the sinking fund was long considered as one of the principal recommendations and

props.

I. On the subject of the sinking fund, we shall have frequent occasion to refer to the statements of Professor Hamilton, in his very valuable publication entitled "An Inquiry concerning the Rise and Progress, the Redemption, and Present State of the National Debt of Great Britain." "The first plan for the discharge of the national debt, formed on a regular system, and conducted with a considerable degree of firmness," says this able writer, "was that of the sinking fund, established in 1716. The author of this plan was the Earl of Stanhope; but as it was adopted under the administration of Sir Robert Walpole, it is commonly denominated from him. The taxes which had before been laid on for limited periods, being rendered perpetual, and distributed among the South Sea, Aggregate, and General Funds, and the produce of these funds being greater than the charges upon them, the surplusses, together with such further surplusses as might afterwards accrue, were united under the name of the Sinking Fund, being appropriated for the discharge of the national debt, and expressly ordained to be applicable to no other purpose whatever. The legal interest had been reduced from 6 to 5 per cent. about two years before; and as that

reduction was unfavourable to the commercial state of the country, Government was now able to obtain the same reduction on the interest of the public debt, and apply the savings in aid of the sinking fund. În 1727 a further reduction of the interest of the public debt, from 5 to 4 per cent. was obtained, by which nearly 400,000l. was added to the sinking fund. And, in the year 1749, the interest of part of the debt was again reduced to 3 per cent. for seven years, and to 3 per cent. thereafter; and, in 1750, the interest of the remainder was reduced to 3 per cent. for five years, and to 3 per cent. thereafter, by which a further saving of about 600,000l. was added to the sinking fund."

This sinking fund was for some time regularly applied to the discharge of debt. The sums applied from 1716 to 1728 amounted to 6,648,000l., being nearly equal to the additional debt contracted in that time. From 1728 to 1733, 5,000,000l. more were paid. The interest of several loans, contracted between 1727 and 1732, was charged upon surplus duties, which, according to the original plan, ought to have been appropriated to the sinking fund.

"Soon after, the principle of preserving the sinking fund inviolable was abandoned. In 1733, 500,000l. was taken from that fund, and applied to the services of the year." " In 1734, 1,200,0001. was taken from the sinking fund for current services; and in 1735 it was anticipated and mortgaged." The produce of the sinking fund at its commencement in 1717, was 323,4377. In 1776, it was at its highest amount, being then 3,166,5177.; in 1780, it had sunk to 2,403,0177.

"The sinking fund would have risen higher, had it not been depressed, especially in the latter period, by various encroachments. It was charged with the interest of several loans, for which no provision was made; and, in 1772, it was charged with an annuity of 100,000l., granted in addition to the civil list. During the three wars which were waged while it subsisted, the whole of its produce was applied to the expense of the war; and even in time of peace, large sums were abstracted from it for current services. According to Dr Price, the amount of public debt paid off by the sinking fund, since its first alienation in 1733, was only 3 millions, paid off in 1736 and 1737; 3 millions in the peace between 1748 and 1756; 21 millions in the peace between 1763 and 1775; in all 8 millions.

"The additional debt discharged during these periods of peace was effected, not by the sinking fund, but from other sources.

"On the whole, this fund did little in time of peace, and nothing in time of war, to the discharge of the national debt. The purpose of its inviolable application was abandoned, and the hopes entertained of its powerful efficacy entirely disappointed. At this time, the nation had no other free revenue, except the land and malt-tax granted annually; and as the land-tax during peace was then granted at a low rate, their produce was inadequate to

the expense of a peace establishment, on the most moderate scale. This gave occasion to encroachments on the sinking fund. Had the land-tax been always continued at 4s. in the pound, it would have gone far to keep the sinking fund, during peace, inviolate."

This fund terminated in 1786, when Mr Pitt's sinking fund was established.

To constitute this new fund, 1 million per annum was appropriated to it by Parliament, the capital stock of the national debt then amounting to 238,231,2487.

This million was to be allowed to accumulate at compound interest, by the addition of the dividends on the stock which it purchased, till it amounted to 4 millions, from which time it was not further to increase. The four millions were then annually to be invested in the public funds as before, but the dividends arising from the stock purchased were no longer to be added to the sinking fund for the purpose of being invested in stock; they were to be applied to the diminution of taxes, or to any other object that Parliament might direct.

A further addition to this fund was proposed by Mr Pitt, and readily adopted in 1792, consisting of a grant of 400,000l. arising from the surplus of the revenue, and a further annual grant of 200,000l.; but it was expressly stipulated that no relief from taxation should be given to the public, as far as this fund was concerned, till the original million, with its accumulations, amounted to 4 millions. The addition made to the fund, by the grant of 400,000l., and of 200,000l. per annum, together with the interest on the stock these sums might purchase, were not to be taken or considered as forming any part of the 4 millions. At the same time (in 1792), a sinking fund of a new character was constituted. It was enacted, that besides a provision for the interest of any loan which should thenceforward be contracted, taxes should also be imposed for a 1 per cent. sinking fund on the capital stock created by it, which should be exclusively employed in the liquidation of such particular loan; and that no relief should be afforded to the public from the taxes which constituted the 1 per cent. sinking fund, until a sum of capital stock, equal in amount to that created by the loan, had been purchased by it. That being accomplished, both the interest and sinking fund were to be applicable to the public service. It was calculated, that, under the most unfavourable circumstances, each loan would be redeemed in forty-five years from the period of contracting it. If made in the 3 per cent., and the price of that stock should continue uniformly at 60. the redemption would be effected in twenty-nine years.

In the years 1798, 1799, and 1800, a deviation was made from Mr Pitt's plan of providing a sinking fund of 1 per cent. on the capital stock created by every loan; for the loans of those years had no sinking fund attached to them. The interest was charged

on the war-taxes; and, in lieu of a 1 per cent. sinking fund, it was provided that the war-taxes should continue during peace, to be then employed in their redemption, till they were all redeemed.

In 1802, Lord Sidmouth, then Mr Addington, was chancellor of the exchequer. He being desirous of liberating the war-taxes from the charges with which they were encumbered, proposed to raise new annual permanent taxes for the interest of the loans of which we have just spoken, as well as for that which he was under the necessity of raising for the service of the year 1802; but he wished to avoid loading the public with additional taxes for a 1 per cent. sinking fund on the capitals created by those loans, and which capitals together amounted to 86,796,3751. To reconcile the stockholder to this arrangement, he proposed to rescind the provision which limited the fund of 1786 to 4 millions, and to consolidate the old and the new sinking funds, i. e. that which arose from the original million per annum, with the addition made to it of 200,000l. per annum subsequently granted, and that which arose from the 1 per cent. on the capital of every loan that had been contracted since 1792. These combined funds he proposed should, from that time, be applied to the redemption of the whole debt without distinction; that the dividends arising from the stock purchased by the commissioners for the reduction of the national debt should be applied in the same manner; and that this arrangement should not be interfered with till the redemption of the whole debt was effected.

In February 1803 the debt amounted to 480,572,4701., and the produce of the joint sinking fund to 6,311,6267. In 1786 the proportion of the sinking fund to the debt was as 1 to 238, in 1792 as 1 to 160, and in 1803 as 1 to 77.

This was the first deviation of importance from Mr Pitt's plan; and this alteration made by Lord Sidmouth was not, perhaps, on the whole, injurious to the stockholder. He lost, indeed, the immediate advantage of an additional sinking fund of 867,9637., the amount of 1 per cent. on the capitals created by the loans of 1798, 1799, 1800, and 1802; "but in lieu," says Mr Huskisson, "of this sinking fund, a reversionary sinking fund was created, to commence, indeed, in about twelve to fifteen years from that time, but to be of such efficacy when it should commence, and to be so greatly accelerated by subsequent additions in its progress, as, under the most unfavourable supposition, to be certain of reducing the whole of this debt within forty-five years. This reversionary sinking fund was to arise in the following manner; by continuing the old sinking fund at compound interest, after it should have reached its maximum of 4 millions; and by continuing also the new sinking fund or aggregate of the 1 per cents. of the loans since 1792, after such 1 per cents. should have liquidated the several loans in respect of which they are originally issued. There is