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NATIONAL CREDIT AND THE

SINKING FUND.

HOW TO MAKE £500,000,000.

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HE analogy between national and individual finance is tolerably complete. The very same causes which go to make an individual poor impoverish a nation. An individual whose debts are heavy will find that his credit is low unless his income is so much greater than his expenditure, that he can devote a considerable sum year by year to paying off his debtors. But if, as in the unhappy case of John Bull and his Government in the present time of peace, new debt has been created as fast as, or faster than, the old debt has been paid off, then who can wonder that the rate of interest is high, credit low, and Consols much depressed? a war Consols usually rise; but Credit is a fastidious and impracticable goddess; prayers without works are vain; from them that ask she turns away; on insolvent debtors she bestows no pity; all her favours are reserved for those who do not beg or borrow. But it does not, follow that therefore those favours are worthless. On the contrary, they may bring untold riches. If we approach the goddess with sacrifices rather than prayers she will add enormously to our wealth and to our strength. I am therefore proposing a plan which will, I hope, commend itself to the City as well as to Parliament. I will show that it is perfectly feasible, that it will involve no sacrifice which the most moderate man will not readily consent to, and that it will infallibly add to the credit and invested wealth of the empire a sum of at least £500,000,000.

My plan or project is simply to create a realannual surplus for the reduction of debt not less than that which operated in 1897-8, when Consols and national credit reached their highest point. In the following table and in parallel columns are the move

ments of the National Debt and of the price of Consols from 1894 to the present time:

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In the Budget of 1899 (April 13), in order to provide for the growing cost of armaments-there had been an increase in four years of 22 millions on the Army Estimates and of 7 millions on the Navy Estimates-Sir Michael Hicks Beach raised certain taxes and took 2 millions off the Sinking Fund. But the 2 millions lopped off the Sinking Fund did not represent the whole or net shrinkage in the reduction of the National Debt in that year of unexampled prosperity and of abounding revenue. Since 1889 (the Imperial Defence Act) a new source of danger to credit had been introduced. While with one hand the Chancellor of the Exchequer was extinguishing Consols, with the other he was creating terminable annuities. In the year 1897-8 the expenditure out of borrowed money on works was over three millions. For the year 1898-9 it was seven millions. Before the Budget of 1899 the Secretary for War had announced that the army would follow suit. A Military Works Bill for barracks, &c., was to be introduced on the pattern of the Naval Works Act. No wonder that while the public supply of stock was increased and the public demand

*To assist the eye in tracing the causal connection I have placed the year ending December, 1893, opposite to the year ending March, 1894, and so on. The difference between 2 per cents. (with the prospect of reduction to 24 per cents. in 1902) and the 2 per cents. already existing in 1898 was only two or three points. The quotations here given are for 2 per cents. till 1901, and for 2 per cents. after 1901. I have bracketed the reduction of 3 millions for 1904 because it was due to a returned Transvaal loan.

diminished the private investor had begun to take alarm, and to anticipate a decline in British credit. From IIO

The effect of this policy was soon felt. in March, April, May, 1899, the price of Consols fell to 108 in June, 106 in July, and 105 in August. By the beginning of September the danger of war with the Transvaal had become apparent; but Consols only fell to 104 in September; and 103 was the average for October, though war broke out in the second week of that month. These figures, I think, are very significant. More immediate injury was done to British credit by Sir Michael Hicks Beach's raid on the Sinking Fund than by the South African war. Even after the dimensions of the war came to be more accurately understood Consols for a long time maintained themselves at 100 or 101. The monthly average from January to June, 1900, was above par, the price for June being 101. Let us look at it in a slightly different way. In the nine months preceding the Boer war, January to September, 1899, the main considerations operating on the minds of investors were the increasing expenditure, the reduction of the Sinking Fund, and the apprehension of trouble in South Africa. The first operated from January to April, and caused a fall of 1 point; the second operated from May to August, and caused a fall of 5 points; the third operated in September, and caused a fall of 1 point. Then we take the nine months following, during which the war was in progress. In October, 1899, the average price of Consols was 103. In June, 1900, the average price of Consols was 1011 Such was the strength of British credit and such the belief of investors in our financial stability that nine months of unprecedentedly costly war only lowered the price by 2 points. These figures are more than the illustration of an argument, they are an argument in themselves.

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From this moment (June, 1900) there was a pretty steady depreciation of British credit down to November, 1901, when Consols reached the lowest average monthly point touched during the war, namely, 912. Perhaps I may be allowed here to point out why this depreciation took place and how it could have been prevented. The occupation of Bloemfontein (March 13) was followed by the annexation of the Orange Free State (May 28); and the occupation of Pretoria (June 5) was followed by the annexation of the Transvaal Republic (September 1). If the military successes had been followed by treaties of peace with guarantees and indemnity, not only would the longest, most costly, and least glorious period of the war have

wn and

been avoided, but the creation of at least a hundred millions worth of debt would have been prevented, and several very oppressive taxes need never have been laid on. There would have been no thirty-five millions loan, no army of occupation, and Consols might not have fallen below par.

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So far my argument is that if Consols were above par in the first half of 1900, when large loans were being raised to meet the cost of an unprecedentedly expensive war they certainly ought to be above par now in a time of peace. Yet during the last year Consols have been as low as 85 and never, I think, higher than 92.

This first part of the argument only establishes a presumption of financial incompetence against the Government. The second argument which I am about to develop will show wherein that incompetence consists, and in exposing the cause we shall discover the remedy.

The table in the official return from which I get the net increase or decrease of the National Debt is melancholy indeed, but it makes the case appear to be better than it really is. The truth is that there has been no real surplus applied to the reduction of debt in any year since the war. Not only during the war but in every year since the war, save one, we have added to the gross liabilities of the State. The three millions of the year ending March 31st, 1904, were only due to a returned loan. In a prefatory note to the Return relating to the National Debt, May 2, 1905, Sir Edward Hamilton writes: "It will be seen from Part I. (p. 9) that the gross liabilities of the State which amounted on March 31, 1904, to £794,498, 100 were increased on balance in the succeeding twelve months to £796,736,491, or by £2,238,391." Yet last year was the best since the year ending March 31, 1899.

What a senseless exhibition the Government is making of itself; what a figure the Chancellor of the Exchequer is cutting. How shameful it is that Parliament and the nation should be befooled by this elaborate sham. A Sinking Fund in full operation yet producing a net increase of debt at the end of the year! Practically the whole failure of the Sinking Fund is due to two sets of Acts-the Naval Works Acts, 1895-1903 (six in all), and the Military Works Acts, 1897 to 1901 (three in all). These Acts authorise, or propose by schedule to authorise-they do not require or compelan expenditure out of borrowed money of 52 millions. Of this sum nearly 34 millions has been issued; 183 millions remains to be issued. Last year the Government actually allowed the Admiralty to spend over

5 millions in this way out of borrowed money while the War Office spent nearly 4 millions in the same way. In the year now begun the same ruinous game is to be continued.

What I propose, then, so far as the current year is concerned, is that Parliament challenge the Chancellor of the Exchequer's provisional estimate of 9 millions (of which 8 millions is for naval and military works) as the sum to be spent out of borrowed money this year, and insist that the various works, harbours, barracks, forts, &c., shall be retarded so that not more than 4 millions of additional debt be created. As special sinking funds are attached to these loans which entail an annual expenditure of about 2 millions (defrayed out of the naval, military, and other votes) the amount of new debt created would then be 2 millions, while the Sinking Fund now amounts to 8 millions. So that under my proposal the National Debt instead of being slightly reduced in this year of peace would be reduced by 6 millions. Next year the Sinking Fund sham should be got rid of and the 64 millions increased to 9 or 10 millions.

By that time virtue would certainly have been rewarded; for everyone, I am sure, who has any knowledge of this subject will agree with me that the policy I have just sketched would very quickly restore the prestige of British credit and send Consols above par. Nothing but the thoroughly rotten and dishonest finance of the last three years could have sent them down from 96, where they stood at the time of the peace of Vereeniging, to 90, where they stand to-day.

"But how," it will be said, “can such a change as you propose bring us in 500 millions? Why, that prodigious gamble of Disraeli's in the Suez Canal shares only yields us a profit of a few hundred thousand every year. This is the question which remains to be answered in these pages.

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So far my argument has gone to show that the creation of a real annual surplus which would reduce the debt by a substantial amount would in a short time very likely within a year, supposing nothing abnormal to happen--restore Consols at least to par. If this be granted, then we get an addition of 80 millions to the value of Consols alone. That is nearly a sixth of my 500 millions. How the rest is to come will now be plain to those who understand the nature of credit. I start from a conservative estimate made by Mr. Lestocq Erskine towards the end of the Boer War. He gave reasons for thinking that the depreciation of Consols and other securities in conse

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