With regard to the above figures it is only necessary to explain that the Exchequer balances are the cash balances standing to the credit of the Exchequer at the Banks of England and Ireland; the "other assets" consist of (a) sums advanced to the Mint for the purchase of bullion; (b) a sum of £3,000,000 advanced to the Transvaal in 1902-3, and repaid in 1903-4; (c) the share of the Indian and Colonial Governments in the liability for the cost of the Red Sea and Pacific cables.

No Real Reduction of Debt.

Bearing these explanations in mind, it will be seen that the figures show clearly that there has been no real reduction of the Debt. In a year of peace, when every effort should have been made to wipe something off this huge debt created by the war, nothing at all was wiped off, but instead a net addition of nearly £2,000,000 was made to the liabilities of the nation.

It may well be asked: How can these things be? Surely the sinking fund was restored by Sir Michael Hicks-Beach in the summer of 1902, and was increased by Mr. Ritchie in his Budget of April, 1903. That is so. The sinking fund was in full operation in both the years 1902-3 and 1903-4; and yet in both years the real debt was increased. The explanation is very simple. While Sir Michael Hicks-Beach and Mr. Ritchie were glorifying themselves for restoring or enlarging the sinking fund, they were borrowing with one hand more money than they paid off with the other. That process of financial hypocrisy still continues, and though the sinking fund has been maintained by the present Chancellor of the Exchequer at a nominal figure of about £7,000,000, it is probable that this year also will see a real increase of the National Debt.

In order to make this matter clear it is necessary to enter with some detail into the history of the sinking fund.

The Farce of the Sinking Fund.

The practice of pretending to pay off debt, while really increasing it, is not a new fact in English history. It is an hereditary disease of English financiers, from which few have escaped. Pitt and his contemporaries were among the worst sufferers from this expensive complaint, and the nation had to pay the doctor's bill.

Under Pitt the disease took the form of a childish faith in the

magic of compound interest. It was provided by Statute that Parliament should every year vote £1,000,000 to the National Debt Commissioners, who were to invest that sum in Consols, and re-invest the interest in more Consols, and so on, year by year, till the whole Debt had, by the magic of compound interest, passed into the hands of the Commissioners, when it could be wiped off. Even in time of peace this was a needlessly costly process, involving much unnecessary book-keeping. In time of war the process became so grotesque that it is difficult to understand how one of the greatest of English statesmen could have permitted the farce to continue. But not only was the process maintained, it was extended, and Parliament actually went so far as to provide that 1 per cent. of every loan raised should be added to the sinking fund. The result, of course, was that the country was compelled to borrow £100 when a loan of £99 would have sufficed. That, however, was not the only result. Every year the Government was raising fresh loans, and every year the National Debt Commissioners-with money supplied by the Government-were buying up more Consols. Thus, on one side of the market the agents of the Government were selling Consols, and on the other side other agents of the Government were buying Consols, and the market made its turn of profit out of both.

So little is the wisdom with which the affairs of nations are directed that this insane practice continued all through the great war. The cost to the nation was terrific. It has been estimated by the official historian of the Debt that the maintenance of Pitt's sinking fund, while new debt was being incurred, involved a net addition to the Debt of no less than £40,000,000. We are still paying interest upon that sum, but apparently we have not yet learnt the lesson so expensively taught.

For a time, however, the lesson was learnt. In the year 1828 a Committee of the House of Commons considered the whole question of the Debt, and after much solemn debate came to the fairly obvious conclusion that it was impossible to pay off debt unless there was an excess of income over expenditure. It had taken Parliament a whole generation to master this elementary truth, yet scarcely had it been mastered before succeeding Chancellors of the Exchequer set to work to try and find some way of escape. The secret of their anxiety is very simple. The repayment of loans, whether in private or in public life, is an unpleasant process. It is always more agreeable to spend money on a new pleasure, whether a battleship or a motor-car, than on an old debt. Realising this, English statesmen have cudgelled their brains to discover devices by which the House of Commons might be constrained against its worser self. All such devices, however well contrived, must fail unless the Chancellor of the Exchequer for the time being is determined that they shall be observed in the spirit as well as in the letter.

The "Old" Sinking Fund.

That condition has rarely been fulfilled. At the present moment there are in nominal operation at least three separate devices for paying off debt. There is first the "Old" Sinking Fund, which is the outcome of the report of the Committee of 1828 above referred to. This Committee, having reported that debt could only be paid off when there was a real surplus of income over expenditure, proposed that the Chancellor of the Exchequer should in each year budget for a substantial surplus, and that the whole of the realised excess of income over expenditure at the close of each year should be paid over to the Commissioners for the reduction of the National Debt. An Act was passed to give effect to this proposal, and that Act still remains in force, and is sometimes still observed. When it is observed, the surplus revenue of one year automatically constitutes the "Old" Sinking Fund of the next year.

It was speedily found, however, that Chancellors of the Exchequer showed no great anxiety to provide a large surplus which would be used automatically for the reduction of debt. They held-and in the thirties and forties they were probably right— that it was even more important to reduce taxation than to reduce debt. The nation was overburdened with taxation, much of it intended to give protection to favoured classes rather than to yield revenue to the State, and until this load was lifted the industries of the country were unable to expand. During the same period, moreover, new debt had to be incurred to compensate Coloniał slave owners, and later, to meet the expenses of the Crimean war.

Mr. Gladstone's Annuities.

Down to the sixties, therefore, we find little real reduction in the National Debt. Meanwhile, Mr. Gladstone had introduced what may be called Sinking Fund No. 2. This is a device for paying off debt gradually by converting Consols into terminable annuities. In order to understand the operation of this device it must be realised that there are two classes of terminable annuities : (a) Those held by the public; (b) those held by Government departments. The first class has existed ever since the National Debt began at the end of the seventeenth century. Some people prefer to buy an annuity for life, or for a fixed term of years, rather than to invest in a permanent security like Consols. In the year ending March 31st, 1904, these annuities amounted to £1,386,000, of which £1,024,000 represented repayment of capital.* means, of course, a reduction of debt, and it is a reduction which must go on even if the Government is simultaneously incurring new debt. Having contracted to pay these annuities, the Government must provide the means to meet them.

That

These annuities, as above stated, have long existed, and much debt has been wiped off by their operation. Mr. Gladstone, observ

See National Debt Return Appendix V.; Annuities for Life, Annuities for Terms of Years, and Red Sea Annuity.

ing this, and observing also that only a small portion of the public cared to buy terminable annuities, hit upon the device of making the Government departments buy Government annuities. The two departments which have to invest money are the Court of Chancery and the Post Office Savings Bank. Normally they invest in Consols. What Mr. Gladstone did was to take part of their Consols from them, and to give them instead annuities for a term of years. The Consols were then cancelled, and the Exchequer became liable for the payment of the annuities to the end of the period fixed.

The arrangement involved a good deal of additional bookkeeping, because neither of these two departments wanted a terminable annuity. Both wanted a permanent investment in order to meet their permanent liabilities. They were, therefore, compelled to re-invest every year in the purchase of fresh Consols that portion of their annuity which represented repayment of capital. From the account-keeping point of view it would obviously have been simpler for the Exchequer to buy up Consols itself year by year as it had money to spare. Mr. Gladstone, however, held that there never would be any money to spare unless some kind of constraint was imposed upon Parliament. He held that the House would regard the contract that the Exchequer had made with the Savings Bank and the Court of Chancery as binding, and would cheerfully provide the money for meeting the annuities; whereas it would have boggled if asked for an identical sum to be used in the direct purchase of Consols.

The

Whether he rightly gauged the intelligence of the House of Commons it is profitless now to discuss. This, however, is certain, that Mr. Gladstone's successors have not hesitated to lay hands upon his annuities whenever it has suited their purpose. process is very simple. The Chancellor of the Exchequer merely informs the departments concerned that so much of their annuities as represents the repayment of capital will be suspended for a year, and the deficiency made good in future years. The only effect upon the departments is to relieve them from the trouble of drawing the money and investing it in Consols. The effect upon the Debt is to postpone the reduction for which the author of the annuities had provided. In a word, Mr. Gladstone's device of departmental annuities is only safe so long as the Chancellor of the Exchequer is honestly anxious to pay off debt, and granted that honest anxiety, a good deal of book-keeping would be saved by leaving the Exchequer to buy up Consols direct, instead of in a roundabout way through the Savings Bank and the Court of Chancery.

Sir Stafford Northcote's Fixed Charge.

A third scheme was invented by Sir Stafford Northcote, not to take the place of, but to supplement Mr. Gladstone's annuity scheme. He proposed that a fixed sum of £28,000,000 should be set aside every year to meet (a) the annual interest of the Debt; (b) the charge for management; (c) the terminable annuities; and

that any balance remaining over should be applied to the direct reduction of debt by the purchase and cancellation of Consols. This balance, thus applied, is officially known as the New Sinking Fund.

The great merit of Sir Stafford Northcote's scheme lay in its power of automatic expansion. The Consols cancelled each year ceased to bear interest, and consequently there was a larger balance available for the reduction of debt the next year. No device could be simpler, or more efficacious, provided only that it was left alone. All that was needed was that Parliament should treat the £28,000,000 as sacred in time of peace. An ever-growing financial reserve would then automatically be built up to meet the strain of war. For a time all went well. Mr. Gladstone, returning to power in 1880, more than carried out the scheme so admirably devised by his predecessor. The Afghan war and the South African war led to increased capital expenditure, and Mr. Gladstone met this by providing that Sir Stafford Northcote's £28,000,000 should be increased for some years to £28,920,000. By so doing he secured an even higher rate of reduction of our capital liabilities than Sir Stafford Northcote had provided for. His successors have been less scrupulous. Under a series of Unionist Chancellors of the Exchequer the fixed charge was wantonly cut down in time of peace, by successive stages, from £28,000,000 to £23,000,000.

Sir Michael Hicks-Beach's Raid.

The least excusable of these raids on the Sinking Fund was made by Sir Michael Hicks-Beach in the spring of 1899. While preaching the virtues of economy, and talking with reverential solemnity of the sacredness of the Sinking Fund, Sir Michael cut down the fund by £2,000,000 a year in order that his party might have the luxury of indulging in increased expenditure without calling upon the electors to pay for it. Eight months later, in framing his first war budget, the same Chancellor of the Exchequer proceeded to show how little he had ever understood the nature of the Sinking Fund, which he had so effusively honoured with lip-service, and so meanly plundered for party ends, by assuring the House of Commons that he was determined not to suspend the Sinking Fund. If this resolve had been maintained the country would have been compelled to re-enact the costly farce of the Great War, when millions of needless debt were incurred in order to keep up the pretence of a sinking fund. It cannot be too often repeated that the whole object of a sinking fund is to create a financial reserve for the emergency of war. But if that reserve is not to be used when war comes, we had better save ourselves from the trouble of creating it. A financial reserve-i.e., a reserve of credit-does not differ in essence from a reserve of cartridges. Both are imperative for the successful conduct of war. But even the British War Office has never committed the absurdity of treating its reserve