BOOK V, CHAPTER III
THE HISTORY OF THE ENGLISH DEBT
§ 1. The longest and in many respects the most instructive history of a continuous national debt is that supplied by Great Britain. The earlier attempts at systematic borrowing in Italy and Holland have ceased to have any practical effect, but the present English debt shows an unbroken record of more than 200 years. The Stuarts had not paid much respect to their obligations, and were quite prepared to repudiate inconvenient liabilities. Still, the expansion of the public economy made it impossible to avoid some floating charges. At the completion of the Revolution in 1689 the debt stood at a little over one million (£1,054,925); in 1691 it had risen to £3,130,000, bearing an interest charge of £232,000. An Act was passed in the next year which is regarded by Macaulay as the origin of the National Debt, and which provided that £1,000,000 should be borrowed on the security of the beer and other liquor duties. The yield of these taxes was to form a fund for the payment of interest, with the proviso that as each subscriber died his annuity was to be divided among the survivors until their number was reduced to seven, when as each annuitant died his share would lapse to the State.*27 The necessities of the war with France compelled further borrowing. The funded debt is first mentioned in 1694. In that year the Bank of England was founded, and lent its subscribed capital, £1,200,000, to the Government at the rate of 8 per cent., which, with an allowance of £4,000 for management, made a total charge of £100,000 per annum. The connexion thus formed between the Bank and the Whig party continued as an influence in politics for several years.*28
At the Peace of Ryswick (1697) the debt had reached £21,500,000, but in the four succeeding years of peace it was reduced to £16,400,000. The East India Company had lent £2,000,000 at 8 per cent. in 1698, which sum was applied to paying other obligations. There was thus a reduction of about £1,250,000 per annum during peace, as against the increase of £2,500,000 per annum during the longer war period, a state of things that we shall find repeated at several subsequent stages of the history. During the war of the Spanish Succession the debt rose at the rate of over £3,000,000 yearly, until at the Peace of Utrecht (1713) it came to £53,680,000.*29
During the peace period, which, with a couple of slight exceptions, extended from 1713 to 1739, the movement of the debt was not uniform. In the first ten years owing to the South Sea Bubble, the war with Spain, and the method of dealing with taxation, it increased to £55,200,000. Then during the remaining sixteen years of peace, under the prudent administration of Walpole, some reduction was made, so that in 1740 the amount was just under £47,000,000, or an annual diminution of £500,000.
§ 2. This first half-century of the debt's existence presents several points of financial interest. The effect of war in adding to debt, to be a little reduced during the succeeding peace, has been noticed. A more important feature is the gradual introduction of funded debt. Annuities, tontines, anticipations of taxes, and floating or temporary liabilities tend to be absorbed in the now established form of capital advances for interest. The various separate debt accounts become blended in one indistinguishable charge. 'The Aggregate Fund was established in 1715 and the South Sea and general Funds in the following year. To each of these funds a variety of branches of revenue were appropriated ... and each of them was charged with the payment of certain annuities then due by the public. The united surplus of these funds formed the basis of the sinking fund established in 1716.'*30 This is the first appearance of the system which, at a later time and in a different form, was regarded as the most effective agency for reducing debt. The primitive sinking fund, usually called 'Walpole's,' was really due to Stanhope. It proved of little service for the purpose to which it was applied, as it depended on the existence of a surplus whether debt would be redeemed, and the contraction of new liabilities would always render nugatory the payments made towards redemption.
The first instances of the process know as 'conversion' also occur in this period. In 1714 the legal rate of interest had been reduced from 6 per cent. to 5 per cent., and three years later a like reduction was made on the interest of the public debt. Again in 1727 a further reduction from 5 per cent. to 4 per cent. was made, by which a saving of £400,000 per annum was realised. The good effect of Walpole's financial management was proved by the high price that the funds had reached. A 3 per cent. loan issued in 1727 stood at par in 1736, and in the next year at 107. Under such conditions it is plain that the whole redeemable debt might have been reduced to 3 per cent. or even lower. Political expediency, which made it an object to favour the fundholders, who were strong supporters of the Hanoverian dynasty, prevented this useful measure.
§ 3. The war of 1739-48 had the usual effect of increasing indebtedness. After the conclusion of peace it was found that £31,300,000 had been added to the previous incumbrances, bringing the total amount to over £78,000,000. The return of peace gave an opening for the application of financial management. Pelham in 1749 succeeded in carrying a conversion scheme, which may be regarded as the forerunner of the modern arrangements of the kind. Interest on part of the debt was reduced to 3½ per cent. for seven years, and 3 per cent. afterwards. Next year that on the remainder was reduced to 3½ per cent. for five years, and 3 per cent. afterwards. The fundholders at first dissented, but the high price of stock made it their advantage to accept the conditions. The consolidated 3 per cent. stock was established in 1751, and existed till the conversion of 1888 as the principal part of the debt. Its price in 1752 was 106¾, the highest point it ever reached. The sluggish condition of trade, and the difficulty of finding good investments sufficiently explain the existence of so high a price.
Up to 1756 the debt had been reduced about £6,000,000 and stood at £72,200,000 when the Seven Years' War commenced. Expenditure at once rose so much as to lead to borrowing, which continued until, at the close of the war in 1763, the funded debt was £122,600,000 with a floating debt of about £14,000,000. The consequences of the war were apparent in the position of the Exchequer for some years afterwards. In 1766 the funded debt had risen to £129,500,000 with a further unfunded one of over £10,000,000. The succeeding years of peace allowed of small reductions, coming in all to about £10,000,000 in 1775, when the funded debt was £125,000,000 and the floating one £4,150,000, or a total of almost £130,000,000. As might be expected, the American war of Independence added seriously to this burden. At the conclusion of the Peace of Versailles (1783) the total debt was over £238,000,000 or an annual increase of about £13,500,000. During the latter part of the war the strain on English credit was shown by the low price obtained for the loans of that period.
Pitt's first administration dates from 1783, and its earlier part, which may be called the peace one, and which ended with the outbreak of the war with France, did not accomplish much in the direction of diminishing the capital of the debt. In 1786 the new Sinking Fund was established, and by 1793 it had redeemed about £10,250,000, leaving a net capital charge of £228,000,000.
The characteristics of the second half century of the debt history are found in the great growth of both capital amount and interest charge. After taking into account the small repayments in time of peace, there remained a net addition of £180,000,000 in the fifty-four years 1739-1792, while the annual payment for interest had risen from £2,000,000 to nearly £9,500,000 in the same period. The terms of borrowing varied, but up to 1780 the loans were usually issued at par: their capital therefore represented the amount really received, though they were accompanied by small annuities for terms of years, or other special favours. Lotteries were also combined with the loans, subscribers to an issue of stock receiving tickets. In 1781, however, a loan of £12,000,000 was raised at the rate of £150 of 3 per cent. and £25 of 4 per cent. stock for £100 paid, or a total capital of £21,000,000. The result of adopting this system was to add nearly £25,000,000 to the nominal capital of the debt without any corresponding receipt. It was probably due to the fear entertained by subscribers that their stock would on the return of better times undergo a reduction of interest, and also to the preference of the government for a large 3 per cent. stock. As mentioned above, the sinking-fund policy which so powerfully affected the course of the debt was started at this time, though its influence was not as yet very noticeable.
§ 4. By far the most important and critical period in the development of the debt is that during the protracted struggle with France, first under the Revolutionary government and afterwards under Napoleon I. Without the abnormal expenditure of the twenty-three years 1793-1815, the sinking fund of 1786 would have automatically wiped out the comparatively small capital liability; and the rapid growth of British industry, free as it would have been from the oppressive taxation that Pitt was compelled to impose, would have made the operation practically unfelt. The whole financial system of Great Britain has been profoundly affected, but the present debt is the most prominent of these results.
From the outbreak of war (1793) to the peace of Amiens (1802) loans were required in every financial year. The amounts, at first small, rose with the great outlay that the continuance of hostilities made necessary, till in 1797 the capital funded was over £67,000,000, the actual sum obtained for this acknowledgment of debt being £44,000,000. As nearly £7,000,000 were redeemed by the sinking fund, in that year, the net increase of debt was somewhat over £60,000,000. In the other years the additional debt contracted was not nearly so large,*31 but the effect of the methods pursued was shown in the amount of debt at the conclusion of peace. It was just £500,000,000, an increase of over £270,000,000 since the opening of war in 1793, i.e. £27,000,000 per annum. The sinking fund had besides paid off £57,000,000 of the debt incurred, which must be added to the other liabilities of the time. The principal cause of this great addition was the unwillingness to impose taxes at the commencement of the war. For the four years 1793-7 the total amount raised in taxation was £70,000,000, or £17,500,000 on the yearly average, while for the four years 1799-1802 it was £134,750,000, or an increase of 92½ per cent.
The short peace did not allow of any reductions in expense, and on the recommencement of war the borrowing system was again applied, though not to so large an extent. At the opening of the year 1816 the funded debt was £816,000,000, with a floating one of £60,000,000, showing a total increase of £360,000,000, or over £25,000,000 per annum. This comparatively satisfactory result, notwithstanding the immense expenditure of the Peninsular War, is explicable by reference to the much heavier taxation imposed. The income tax was in full operation, and the tax revenue rose from £37,250,000 in 1803 to £75,500,000 in 1815. Mr. Gladstone has asserted that the early adoption of the income tax would have saved the necessity of borrowing, since the annual expenditure apart from the debt charge would in the later years have been met by the receipts from taxation.*32 Whether this would have been possible may be a matter of dispute, but there can be no question that the system of loans was carried to excess.
From the facts just noticed we can see clearly the defects in the method of finance during this trying period. They are: (1) the dislike to impose sufficient taxation, a feeling very natural on political grounds, but indefensible from the purely financial point of view. Instances of this error occur chiefly in the earlier years. (2) An undue reliance on the purely illusory expedient of a sinking fund, which, taking the most favourable view, increased the expense of management and deranged the loan market. (3) The system of borrowing at a higher nominal capital than the amount actually received, thereby preventing, or at least hindering, future conversions of debt.
§ 5. The French wars brought the English debt to its maximum point. Since that date there has been some, though insufficient reduction of it. The whole course of treatment has tended towards the adoption of a sounder and more careful policy, guided in a great degree by the influence of theory. The criticisms of Hamilton and Ricardo*33 exposed completely the sinking-fund fallacy. As the result of careful inquiry it was settled, in 1819, that a real surplus of £5,000,000 annually should be preserved; but after various difficulties and changes, the sinking-fund as a positive institution was abolished in 1829, whatever actual surplus existed at the end of each financial year being marked off for redemption of debt. The continuance of peace enabled the method of conversion to be tried with effect, though the field of operations was limited by the mistaken policy of borrowing in a 3 per cent. stock with a high nominal capital. In 1822 £152,000,000 of 5 per cent. stock was converted into 4 per cents., and in 1830 further reduced to 3½ per cents. The old 5 per cent. stock (76,250,000) was reduced to 3½ per cent., to which rate a small balance of 4 per cents. (about £10,000,000) was also reduced in 1834.
One of the most discreditable periods in English finance was that between 1830 and 1840. Hardly any fiscal reforms were carried out, and the debt was increased by budget deficits. Its amount in 1841 was £792,000,000, nearly £8,000,000 more than in 1830. The firmer administration of Peel restored the finances. A surplus was procured by the revived income tax, and a fall in the rate of interest made it possible in 1844 to convert the 3½ per cent. stock—£248,000,000—into 3¼ per cent. for ten years and 3 per cent. afterwards. The attempt made by Gladstone, in 1853, to create a 2½ per cent. stock, proved a failure, owing to the rise in interest and the pressure of the Crimean War (1854-5). This latter event supplied further illustration of the operation of war on indebtedness; though the progress of wiser views as to the treatment of extraordinary expenditure was evidenced by the increased taxation, which contributed the larger part of the total war expenditure (£70,000,000), leaving only £34,000,000 to be added to the debt.
§ 6. For nearly half-a-century (1856-1899) no important increase in debt took place, and the growth of wealth made the weight of the existing charge much less oppressive. Moreover though there was no energetic action for the repayment of the debt, the influence of the reformed sinking-fund, the terminable annuities, and conversion produced a decided effect on both capital and interest: in fact during this period the history of the debt consists in an account of their operation.
When the sinking-fund theory was abandoned, the old rule still applied by which the surplus remaining in the Exchequer at the end of each financial year passed to the Commissioners for the redemption of the debt. If large surpluses were realised year after year, this would be a satisfactory method, but with accurate balancing of receipts and expenses it is of little service. A considerable excess of receipts over expenditure gives rise to a cry for remission of taxation that is not easily withstood. Hence the need for marking off some special funds for the payment of debt Sir S. Northcote's sinking-fund measure (1875), by which an amount of £28,000,000 annually was permanently set apart for this end, is the most obvious course. Unfortunately it is very easy to find plausible reasons for cutting down the sum so fixed. Under Lord Goschen the £28,000,000 became first £26,000,000 and then only £25,000,000, a sum which left a comparatively small margin over the interest and terminable annuity payments but which was again reduced by Sir M. Hicks-Beach in 1899 to £23,000,000.*34
The method of redeeming debt by the use of terminable annuities was on the whole more effective. In their commencement public debts were often raised by annuities in various forms,*35 and during the Revolutionary and Napoleonic wars the system of adding long annuities to the funded loans was adopted, the periods being so arranged as to all terminate in 1860. By this system a considerable relief was gained when the date of expiry was reached. As an effective method of redemption fresh terminable annuities have been created, and an equivalent amount of stock cancelled. The largest creations were in 1868 and 1884. In the former year £24,000,000 of savings-bank stock was cancelled, and an annuity of £1,760,000 substituted. In 1884 Chancery stock to the amount of £40,000,000, and over £30,000,000 of Post Office savings bank stock, were similarly treated, with the result that the funded debt was brought within more moderate limits. In 1860-1 its total amount was £788,970,799. After thirty years it stood in 1890-1 at £579,472,082, or almost £210,000,000 less. On the other hand, the terminable annuities had risen in capital value from £16,500,000 to £68,500,000, an increase of £52,000,000. In 1889 the funded debt had risen to £583,186,305, owing to a reduction of floating charges, while the terminable annuities were reduced to a capital value of £36,250,000.
Within the last fifteen years the agency of conversion has also been employed with success. Mr. Childers's conversion scheme of 1884, by which 2½ or 2¾ per cent. stock might, at the option of the holder, be obtained for the existing 3 per cents., with an increased capital of 2 or 8 per cent., according to the stock chosen, failed to attract. Only £21,648,000 of stock was offered for conversion (more than half of it from public offices). But the failure of this attempt prepared the way for Lord Goschen's success in 1888. The principles adopted by him were: (1) the creation of a single new stock, so that holders were not confused by having to choose; (2) the avoidance of any addition to capital; (3) the use of the most effective technical methods, such as conversion without expressed consent, where this course was legal, commission to agents for the trouble imposed on them, and a small concession in the substitution of quarterly for half-yearly payments of interest. These contrivances, together with the persistent low rate of interest, enabled the conversion to be carried out with complete success. The whole mass of 3 per cent. stock, amounting to £558,000,000, was converted, or paid off.*36 A new stock, bearing interest at 2¾ till 1903, and at 2½ from that date for twenty years, has taken the place of the older 3 per cents., and a relief in interest to the amount of £1,400,000 annually has been secured, with the certainty of an equal gain in 1903. As an incident of the process the floating debt became larger, and amounted in 1891 to £36,000,000 or more than double the normal level. But by degrees the greater part of this sum was funded, so that in April, 1899, the floating debt was only £8,133,000.
§ 7. A new chapter in the history of the debt began with the outbreak of the South African War in October 1899. It was at first believed that the cost would be small—£10,000,000 being the earliest estimate—and the only provision made was an issue of £8,000,000 in Exchequer Bills. By the close of the financial year 1899-1900 the real character of the contest was better understood, and a war loan for £30,000,000 was issued with an appeal to patriotic sentiment, to run for ten years, bearing 3 per cent. interest at the price of £98 10s., or 1½ per cent. discount. Further issues, in the form of Exchequer Bonds, with 3 per cent. interest, and redeemable, some in 1903, and the remainder in 1905, followed. These represented a capital debt charge of £24,000,000. In 1901 it was evident that the expedient of creating unfunded debt had been carried to its utmost limit, and accordingly one of the features of the budget proposals of that year was the issue of £60,000,000 of the ordinary Consols at the price of £94 10s. or a discount of 5½ per cent. As the war continued during the first months of 1902, another loan in Consols to the amount of £32,000,000 was arranged at the fixed price of £93 10s., giving a discount of £2,080,000 on the whole amount.*37 Even the conclusion of peace did not relieve the country from the necessity of contracting this fresh liability, though it was hoped that a part of the funds obtained by it might be available for the repayment of debt. During the years 1899-1902 there was also a suspension of the operations for the redemption of the debt which provided a further resource of between four and five millions a year. The net result has been a decided increase in all the different forms of indebtedness. The floating debt has somewhat increased; the Exchequer Bonds and the £30,000,000 war loan represent short term loans of a class better known in American than in English finance. The terminable annuities have been raised to £60,000,000 by the provisions of the Budget of 1899.*38 But the funded debt, though relieved by the adjustment just mentioned, has had two large issues of Consols added to it. In short, the total charge on March 31st, 1902, was £747,876,000, an increase of £60,000,000 over the total of the preceding year.
The preceding details afford certain obvious points for criticism. First, there is the large proportion of the war expenses supplied by borrowing. Some difficulty exists as to the exact figures, but it is well within the mark to say that more than two-thirds of the extraordinary outlay has been met out of loans, a position that compares unfavourably with the similar case of the Crimean War. Next, there is the curious policy of issuing loans at a fixed discount, instead of inviting tenders, or so arranging the interest that the par value should be obtained. Finally, there is the question whether all the issues should not have been in the form of a single uniform stock, which would command a better price, and if issued at 3 per cent. would in a short time be ready for conversion. But the most interesting question is one of the immediate future, viz. the method and extent of the proceedings for redemption. A good deal of stock will be ready for treatment in the years 1905 and 1910. Much, however, must depend on the market price of Consols, and therefore the agencies of redemption will have to be kept in an elastic form. In any case there has been a clear illustration of the way in which two or throe years of war will undo the work of eighteen or twenty years of peace.*39
§ 8. Looking back on the course of the English debt, it is very plain that its growth has been altogether due to war expenditure, while its continued existence must be largely attributed to financial weakness. A comparison of the debt incurred during each war with the amount paid off in each succeeding peace establishes this. Over £600,000,000 was added in the great war (1793-1815); hardly £75,000,000 was paid off in the forty years' peace. The Crimean War added £34,000,000; it took twelve years of peace to pay off this sum. The South African War has increased the capital of the debt by £160,000,000. It is safe to say that twenty years of unbroken peace will hardly suffice to remove this extra burden. Greater vigour in the use of terminable annuities, the maintenance of larger surpluses, and above all a wider employment of direct taxation in the form of income, property, and inheritance taxes are the means by which better results might be obtained. The pressure of the debt, however calculated, is too light to justify such remissness. When we remember that each million of debt redeemed means the power of permanently remitting as much taxation as is represented by its interest charge we can better understand the advantage of an energetic policy in regard to it.
Notes for this chapter
Macaulay, Hist. of England, ii. 398.
Macaulay, Hist. ii. 479; Rogers, First Nine Years of the Bank of England, xiii. xiv.
One curious item, the oldest of all, and hence sometimes regarded as the origin of the debt, was added in 1706. The Cabal Government of Charles II. bad in 1672 seized on the Goldsmiths' loans to the Exchequer, a proceeding known as the 'shutting of the Exchequer,' and had simply paid interest on the amount of £1,328,000 detained. In 1683 even the interest was stopped. Legal proceedings were taken by the sufferers, and after a series of trials the House of Lords decided in their favour; but by an Act of 1699 it was provided that after December 25th, 1705, one-half the amount (£664,000) should be added to the existing debt, to bear interest at 6 per cent.
The following was the capital funded for each year between 1793-1802:—
See Hamilton, 256.
Financial Statements, 16.
Hamilton's Inquiry was published in 1813, and Ricardo's Essay on the Funding System in 1820.
By the budget of 1894 an aggregate sum of £2,123,000 was placed on the reduced sinking fund, thus lowering still more the amount devoted in that year to the redemption of debt.
See § 1, and ch. 6, § 2, of present Book.
The total was composed as follows:—
About £58,000,000 was held by government departments, leaving £500,000,000 in the hands of the public.
The amount for which payment was demanded was very small; in the case of the 'new threes,' only £761,000, or less than ½ per cent.
The following are the details of the different loans:—
National War Loan £30,000,000, 2¾ per cent. interest, redeemable April 5th, 1910, issued at £98 10s. 0d.
Exchequer Bonds, £10,000,000, 3 per cent. interest, redeemable August 7th, 1903, issued at £98.
Exchequer Bonds, £3,000,000, 3 per cent. interest, redeemable December 7th, 1905, issued at £98 2s. 11d.
Exchequer Bonds, £11,000,000, 3 per cent. interest, redeemable December 7th, 1905, issued at £97 5s. 4d.
Consols, £60,000,000, issued at £94 10s.
" £32,000,000, " " £93 10s.
Treasury Bills in various amounts. Total for War purposes, £13,000,000.
This operation consisted in the cancelling of £28,000,000 of Consols and the substitution of two annuities arranged to expire in 1923.
The figure of £747,876,000, given above as the debt burden in 1902, is slightly higher than that of 1884, which was £746,424,000. The inclusion of the latest loan of £32,000,000 would bring us back to 1873 with its total of £779,222,000.
Book V, Chapter IV
End of Notes
Return to top