In Great Britain, the annual land and malt taxes are regularly anticipated every year, by virtue of a borrowing clause constantly inserted into the acts which impose them. The bank of England generally advances at an interest, which, since the Revolution, has varied from eight to three per cent., the sums of which those taxes are granted, and receives payment as their produce gradually comes in. If there is a deficiency, which there always is, it is provided for in the supplies of the ensuing year. The only considerable branch of the public revenue which yet remains unmortgaged, is thus regularly spent before it comes in. Like an improvident spendthrift, whose pressing occasions will not allow him to wait for the regular payment of his revenue, the state is in the constant practice of borrowing of its own factors and agents, and of paying interest for the use of its own money.
In the reign of king William, and during a great part of that of queen Anne, before we had become so familiar as we are now with the practice of perpetual funding, the greater part of the new taxes were imposed but for a short period of time (for four, five, six, or seven years only), and a great part of the grants of every year consisted in loans upon anticipations of the produce of those taxes. The produce being frequently insufficient for paying, within the limited term, the principal and interest of the money borrowed, deficiencies arose; to make good which, it became necessary to prolong the term.
In 1697, by the 8th of William III., c. 20, the deficiencies of several taxes were charged upon what was then called the first general mortgage or fund, consisting of a prolongation to the first of August 1706, of several different taxes, which would have expired within a shorter term, and of which the produce was accumulated into one general fund. The deficiencies charged upon this prolonged term amounted to £5,160,459: 14: 9½.
In 1701, those duties, with some others, were still further prolonged, for the like purposes, till the first of August 1710, and were called the second general mortgage or fund. The deficiencies charged upon it amounted to £2,055,999: 7: 11½.
In 1707, those duties were still further prolonged, as a fund for new loans, to the first of August 1712, and were called the third general mortgage or fund. The sum borrowed upon it was £983,254:11:9¼.
In 1708, those duties were all (except the old subsidy of tonnage and poundage, of which one moiety only was made a part of this fund, and a duty upon the importation of Scotch linen, which had been taken off by the articles of union) still further continued, as a fund for new loans, to the first of August 1714, and were called the fourth general mortgage or fund. The sum borrowed upon it was £925,176:9:2¼.
In 1709, those duties were all ( except the old subsidy of tonnage and poundage, which was now left out of this fund altogether ) still further continued, for the same purpose, to the first of August 1716, and were called the fifth general mortgage or fund. The sum borrowed upon it was £922,029:6s.
In 1710, those duties were again prolonged to the first of August 1720, and were called the sixth general mortgage or fund. The sum borrowed upon it was £1,296,552:9:11¾.
In 1711, the same duties (which at this time were thus subject to four different anticipations), together with several others, were continued for ever, and made a fund for paying the interest of the capital of the South-sea company, which had that year advanced to government, for paying debts, and making good deficiencies, the sum of £9,177,967:15:4d, the greatest loan which at that time had ever been made.
Before this period, the principal, so far as I have been able to observe, the only taxes, which, in order to pay the interest of a debt, had been imposed for perpetuity, were those for paying the interest of the money which had been advanced to government by the bank and East-India company, and of what it was expected would be advanced, but which was never advanced, by a projected land bank. The bank fund at this time amounted to £3,375,027:17:10½, for which was paid an annuity or interest of £206,501:15:5d. The East-India fund amounted to £3,200,000, for which was paid an annuity or interest of £160,000; the bank fund being at six per cent., the East-India fund at five per cent. interest.
In 1715, by the first of George I., c. 12, the different taxes which had been mortgaged for paying the bank annuity, together with several others, which, by this act, were likewise rendered perpetual, were accumulated into one common fund, called the aggregate fund, which was charged not only with the payment of the bank annuity, but with several other annuities and burdens of different kinds. This fund was afterwards augmented by the third of George I., c.8., and by the fifth of George I., c. 3, and the different duties which were then added to it were likewise rendered perpetual.
In 1717, by the third of George I., c. 7, several other taxes were rendered perpetual, and accumulated into another common fund, called the general fund, for the payment of certain annuities, amounting in the whole to £724,849:6:10½.
In consequence of those different acts, the greater part of the taxes, which before had been anticipated only for a short term of years were rendered perpetual, as a fund for paying, not the capital, but the interest only, of the money which had been borrowed upon them by different successive anticipations.
Had money never been raised but by anticipation, the course of a few years would have liberated the public revenue, without any other attention of government besides that of not overloading the fund, by charging it with more debt than it could pay within the limited term, and not of anticipating a second time before the expiration of the first anticipation. But the greater part of European governments have been incapable of those attentions. They have frequently overloaded the fund, even upon the first anticipation; and when this happened not to be the case, they have generally taken care to overload it, by anticipating a second and a third time, before the expiration of the first anticipation. The fund becoming in this manner altogether insufficient for paying both principal and interest of the money borrowed upon it, it became necessary to charge it with the interest only, or a perpetual annuity equal to the interest; and such improvident anticipations necessarily gave birth to the more ruinous practice of perpetual funding. But though this practice necessarily puts off the liberation of the public revenue from a fixed period, to one so indefinite that it is not very likely ever to arrive; yet, as a greater sum can, in all cases, be raised by this new practice than by the old one of anticipation, the former, when men have once become familiar with it, has, in the great exigencies of the state, been universally preferred to the latter. To relieve the present exigency, is always the object which principally interests those immediately concerned in the administration of public affairs. The future liberation of the public revenue they leave to the care of posterity.
During the reign of queen Anne, the market rate of interest had fallen from six to five per cent.; and, in the twelfth year of her reign, five per cent. was declared to be the highest rate which could lawfully be taken for money borrowed upon private security. Soon after the greater part of the temporary taxes of Great Britain had been rendered perpetual, and distributed into the aggregate, South-sea, and general funds, the creditors of the public, like those of private persons, were induced to accept of five per cent. for the interest of their money, which occasioned a saving of one per cent. upon the capital of the greater part or the debts which had been thus funded for perpetuity, or of one-sixth of the greater part of the annuities which were paid out of the three great funds above mentioned. This saving left a considerable surplus in the produce of the different taxes which had been accumulated into those funds, over and above what was necessary for paying the annuities which were now charged upon them, and laid the foundation of what has since been called the sinking fund. In 1717, it amounted to £523,454:7:7½. In 1727, the interest of the greater part of the public debts was still further reduced to four per cent.; and, in 1753 and 1757, to three and a-half, and three per cent., which reductions still further augmented the sinking fund.
A sinking fund, though instituted for the payment of old, facilitates very much the contracting of new debts. It is a subsidiary fund, always at hand, to be mortgaged in aid of any other doubtful fund, upon which money is proposed to be raised in any exigency of the state. Whether the sinking fund of Great Britain has been more frequently applied to the one or to other of those two purposes, will sufficiently appear by and by.
Besides those two methods of borrowing, by anticipations and by a perpetual funding, there are two other methods, which hold a sort of middle place between them; these are, that of borrowing upon annuities for terms of years, and that of borrowing upon annuities for lives.
During the reigns of king William and queen Anne, large sums were frequently borrowed upon annuities for terms of years, which were sometimes longer and sometimes shorter. In 1695, an act was passed for borrowing one million upon an annuity of fourteen per cent., or £140,000 a-year, for sixteen years. In 1691, an act was passed for borrowing a million upon annuities for lives, upon terms which, in the present times, would appear very advantageous; but the subscription was not filled up. In the following year, the deficiency was made good, by borrowing upon annuities for lives, at fourteen per cent. or a little more than seven years purchase. In 1695, the persons who had purchased those annuities were allowed to exchange them for others of ninety-six years, upon paying into the exchequer sixty-three pounds in the hundred; that is, the difference between fourteen per cent. for life, and fourteen per cent. for ninety-six years, was sold for sixty-three pounds, or for four and a-half years purchase. Such was the supposed instability of government, that even these terms procured few purchasers. In the reign of queen Anne, money was, upon different occasions, borrowed both upon annuities for lives, and upon annuities for terms of thirty-two, of eighty-nine, of ninety-eight, and of ninety-nine years. In 1719, the proprietors of the annuities for thirty-two years were induced to accept, in lieu of them, South-sea stock to the amount of eleven and a-half years purchase of the annuities, together with an additional quantity of stock, equal to the arrears which happened then to be due upon them. In 1720, the greater part of the other annuities for terms of years, both long and short, were subscribed into the same fund. The long annuities, at that time, amounted to £666,821: 8:3½ a-year. On the 5th of January 1775, the remainder of them, or what was not subscribed at that time, amounted only to £136,453:12:8d.
During the two wars which began in 1739 and in 1755, little money was borrowed, either upon annuities for terms of years, or upon those for lives. An annuity for ninety-eight or ninety-nine years, however, is worth nearly as much as a perpetuity, and should therefore, one might think, be a fund for borrowing nearly as much. But those who, in order to make family settlements, and to provide for remote futurity, buy into the public stocks, would not care to purchase into one of which the value was continually diminishing; and such people make a very considerable proportion, both of the proprietors and purchasers of stock. An annuity for a long term of years, therefore, though its intrinsic value may be very nearly the same with that of a perpetual annuity, will not find nearly the same number of purchasers. The subscribers to a new loan, who mean generally to sell their subscription as soon as possible, prefer greatly a perpetual annuity, redeemable by parliament, to an irredeemable annuity, for a long term of years, of only equal amount. The value of the former may be supposed always the same, or very nearly the same; and it makes, therefore, a more convenient transferable stock than the latter.
During the two last-mentioned wars, annuities, either for terms of years or for lives, were seldom granted, but as premiums to the subscribers of a new loan, over and above the redeemable annuity or interest, upon the credit of which the loan was supposed to be made. They were granted, not as the proper fund upon which the money was borrowed, but as an additional encouragement to the lender.
Annuities for lives have occasionally been granted in two different ways; either upon separate lives, or upon lots of lives, which, in French, are called tontines, from the name of their inventor. When annuities are granted upon separate lives, the death of every individual annuitant disburdens the public revenue, so far as it was affected by his annuity. When annuities are granted upon tontines, the liberation of the public revenue does not commence till the death of all the annuitants comprehended in one lot, which may sometimes consist of twenty or thirty persons, of whom the survivors succeed to the annuities of all those who die before them; the last survivor succeeding to the annuities of the whole lot. Upon the same revenue, more money can always be raised by tontines than by annuities for separate lives. An annuity, with a right of survivorship, is really worth more than an equal annuity for a separate life; and, from the confidence which every man naturally has in his own good fortune, the principle upon which is founded the success of all lotteries, such an annuity generally sells for something more than it is worth. In countries where it is usual for government to raise money by granting annuities, tontines are, upon this account, generally preferred to annuities for separate lives. The expedient which will raise most money, is almost always preferred to that which is likely to bring about, in the speediest manner, the liberation of the public revenue.
In France, a much greater proportion of the public debts consists in annuities for lives than in England. According to a memoir presented by the parliament of Bourdeaux to the king, in 1764, the whole public debt of France is estimated at twenty-four hundred millions of livres; of which the capital, for which annuities for lives had been granted, is supposed to amount to three hundred millions, the eighth part of the whole public debt. The annuities themselves are computed to amount to thirty millions a-year, the fourth part of one hundred and twenty millions, the supposed interest of that whole debt. These estimations, I know very well, are not exact; but having been presented by so very respectable a body as approximations to the truth, they may, I apprehend, be considered as such. It is not the different degrees of anxiety in the two governments of France and England for the liberation of the public revenue, which occasions this difference in their respective modes of borrowing; it arises altogether from the different views and interests of the lenders.
In England, the seat of government being in the greatest mercantile city in the world, the merchants are generally the people who advance money to government. By advancing it, they do not mean to diminish, but, on the contrary, to increase their mercantile capitals; and unless they expected to sell, with some profit, their share in the subscription for a new loan, they never would subscribe. But if, by advancing their money, they were to purchase, instead of perpetual annuities, annuities for lives only, whether their own or those of other people, they would not always be so likely to sell them with a profit. Annuities upon their own lives they would always sell with loss; because no man will give for an annuity upon the life of another, whose age and state of health are nearly the same with his own, the same price which he would give for one upon his own. An annuity upon the life of a third person, indeed, is, no doubt, of equal value to the buyer and the seller; but its real value begins to diminish from the moment it is granted, and continues to do so, more and more, as long as it subsists. It can never, therefore, make so convenient a transferable stock as a perpetual annuity, of which the real value may be supposed always the same, or very nearly the same.
In France, the seat of government not being in a great mercantile city, merchants do not make so great a proportion of the people who advance money to government. The people concerned in the finances, the farmers-general, the receivers of the taxes which are not in farm, the court-bankers, etc. make the greater part of those who advance their money in all public exigencies. Such people are commonly men of mean birth, but of great wealth, and frequently of great pride. They are too proud to marry their equals, and women of quality disdain to marry them. They frequently resolve, therefore, to live bachelors; and having neither any families of their own, nor much regard for those of their relations, whom they are not always very fond of acknowledging, they desire only to live in splendour during their own time, and are not unwilling that their fortune should end with themselves. The number of rich people, besides, who are either averse to marry, or whose condition of life renders it either improper or inconvenient for them to do so, is much greater in France than in England. To such people, who have little or no care for posterity, nothing can be more convenient than to exchange their capital for a revenue, which is to last just as long, and no longer, than they wish it to do.
The ordinary expense of the greater part of modern governments, in time of peace, being equal, or nearly equal, to their ordinary revenue, when war comes, they are both unwilling and unable to increase their revenue in proportion to the increase of their expense. They are unwilling, for fear of offending the people, who, by so great and so sudden an increase of taxes, would soon be disgusted with the war; and they are unable, from not well knowing what taxes would be sufficient to produce the revenue wanted. The facility of borrowing delivers them from the embarrassment which this fear and inability would otherwise occasion. By means of borrowing, they are enabled, with a very moderate increase of taxes, to raise, from year to year, money sufficient for carrying on the war; and by the practice of perpetual funding, they are enabled, with the smallest possible increase of taxes, to raise annually the largest possible sum of money. In great empires, the people who live in the capital, and in the provinces remote from the scene of action, feel, many of them, scarce any inconveniency from the war, but enjoy, at their ease, the amusement of reading in the newspapers the exploits of their own fleets and armies. To them this amusement compensates the small difference between the taxes which they pay on account of the war, and those which they had been accustomed to pay in time of peace. They are commonly dissatisfied with the return of peace, which puts an end to their amusement, and to a thousand visionary hopes of conquest and national glory, from a longer continuance of the war.
The return of peace, indeed, seldom relieves them from the greater part of the taxes imposed during the war. These are mortgaged for the interest of the debt contracted, in order to carry it on. If, over and above paying the interest of this debt, and defraying the ordinary expense of government, the old revenue, together with the new taxes, produce some surplus revenue, it may, perhaps, be converted into a sinking fund for paying off the debt. But, in the first place, this sinking fund, even supposing it should be applied to no other purpose, is generally altogether inadequate for paying, in the course of any period during which it can reasonably be expected that peace should continue, the whole debt contracted during the war; and, in the second place, this fund is almost always applied to other purposes.
The new taxes were imposed for the sole purpose of paying the interest of the money borrowed upon them. If they produce more, it is generally something which was neither intended nor expected, and is, therefore, seldom very considerable. Sinking funds have generally arisen, not so much from any surplus of the taxes which was over and above what was necessary for paying the interest or annuity originally charged upon them, as from a subsequent reduction of that interest; that of Holland in 1655, and that of the ecclesiastical state in 1685, were both formed in this manner. Hence the usual insufficiency of such funds.
During the most profound peace, various events occur, which require an extraordinary expense; and government finds it always more convenient to defray this expense by misapplying the sinking fund, than by imposing a new tax. Every new tax is immediately felt more or less by the people. It occasions always some murmur, and meets with some opposition. The more taxes may have been multiplied, the higher they may have been raised upon every different subject of taxation; the more loudly the people complain of every new tax, the more difficult it becomes, too, either to find out new subjects of taxation, or to raise much higher the taxes already imposed upon the old. A momentary suspension of the payment of debt is not immediately felt by the people, and occasions neither murmur nor complaint. To borrow of the sinking fund is always an obvious and easy expedient for getting out of the present difficulty. The more the public debts may have been accumulated, the more necessary it may have become to study to reduce them; the more dangerous, the more ruinous it may be to misapply any part of the sinking fund; the less likely is the public debt to be reduced to any considerable degree, the more likely, the more certainly, is the sinking fund to be misapplied towards defraying all the extraordinary expenses which occur in time of peace. When a nation is already overburdened with taxes, nothing but the necessities of a new war, nothing but either the animosity of national vengeance, or the anxiety for national security, can induce the people to submit, with tolerable patience, to a new tax. Hence the usual misapplication of the sinking fund.
In Great Britain, from the time that we had first recourse to the ruinous expedient of perpetual funding, the reduction of the public debt, in time of peace, has never borne any proportion to its accumulation in time of war. It was in the war which began in 1668, and was concluded by the treaty of Ryswick, in 1697, that the foundation of the present enormous debt of Great Britain was first laid.
On the 31st of December 1697, the public debts of Great Britain, funded and unfunded, amounted to £21,515,742:13:8½. A great part of those debts had been contracted upon short anticipations, and some part upon annuities for lives; so that, before the 31st of December 1701, in less than four years, there had partly been paid off; and partly reverted to the public, the sum of £5,121,041:12:0¾d; a greater reduction of the public debt than has ever since been brought about in so short a period of time. The remaining debt, therefore, amounted only to £16,394,701:1:7¼d.
In the war which began in 1702, and which was concluded by the treaty of Utrecht, the public debts were still more accumulated. On the 31st of December 1714, they amounted to £53,681,076:5:6½. The subscription into the South-sea fund, of the short and long annuities, increased the capital of the public debt; so that, on the 31st of December 1722, it amounted to £55,282,978:1:3 5/6. The reduction of the debt began in 1723, and went on so slowly, that, on the 31st of December 1739, during seventeen years-of profound peace, the whole sum paid off was no more than £8,328,554:17:11 3/12, the capital of the public debt, at that time, amounting to £46,954,623:3:4 7/12.
The Spanish war, which began in 1739, and the French war which soon followed it, occasioned a further increase of the debt, which, on the 31st of December 1748, after the war had been concluded by the treaty of Aix-la-Chapelle, amounted to £78,293,313:1:10¾. The most profound peace, of 17 years continuance, had taken no more than £8,328,354, 17:11¼ from it. A war, of less than nine years continuance, added £31,338,689:18: 6 1/6 to it. {See James Postlethwaite's History of the Public Revenue.}
During the administration of Mr. Pelham, the interest of the public debt was reduced, or at least measures were taken for reducing it, from four to three per cent.; the sinking fund was increased, and some part of the public debt was paid off. In 1755, before the breaking out of the late war, the funded debt of Great Britain amounted to £72,289,675. On the 5th of January 1763, at the conclusion of the peace, the funded debt amounted debt to £122,603,336:8:2¼. The unfunded debt has been stated at £13,927,589:2:2. But the expense occasioned by the war did not end with the conclusion of the peace; so that, though on the 5th of January 1764, the funded debt was increased (partly by a new loan, and partly by funding a part of the unfunded debt) to £129,586,789:10:1¾, there still remained (according to the very well informed author of Considerations on the Trade and Finances of Great Britain) an unfunded debt, which was brought to account in that and the following year, of £9,975,017: 12:2 15/44d. In 1764, therefore, the public debt of Great Britain, funded and unfunded together, amounted, according to this author, to £139,561,807:2:4. The annuities for lives, too, which had been granted as premiums to the subscribers to the new loans in 1757, estimated at fourteen years purchase, were valued at £472,500; and the annuities for long terms of years, granted as premiums likewise, in 1761 and 1762, estimated at twenty-seven and a-half years purchase, were valued at £6,826,875. During a peace of about seven years continuance, the prudent and truly patriotic administration of Mr. Pelham was not able to pay off an old debt of six millions. During a war of nearly the same continuance, a new debt of more than seventy-five millions was contracted.
On the 5th of January 1775, the funded debt of Great Britain amounted to £124,996,086, 1:6¼d. The unfunded, exclusive of a large civil-list debt, to £4,150,236:3:11 7/8. Both together, to £129,146,322:5:6. According to this account, the whole debt paid off, during eleven years of profound peace, amounted only to £10,415,476:16:9 7/8. Even this small reduction of debt, however, has not been all made from the savings out of the ordinary revenue of the state. Several extraneous sums, altogether independent of that ordinary revenue, have contributed towards it. Amongst these we may reckon an additional shilling in the pound land tax, for three years; the two millions received from the East-India company, as indemnification for their territorial acquisitions; and the one hundred and ten thousand pounds received from the bank for the renewal of their charter. To these must be added several other sums, which, as they arose out of the late war, ought perhaps to be considered as deductions from the expenses of it. The principal are,
The produce of French prizes.............. £690,449: 18: 9
Composition for French prisoners......... 670,000: 0: 0
What has been received from the sale
of the ceded islands......................... 95,500: 0: 0
Total, .....................................£1,455,949: 18: 9
If we add to this sum the balance of the earl of Chatham's and Mr. Calcraft's accounts, and other army savings of the same kind, together with what has been received from the bank, the East-India company, and the additional shilling in the pound land tax, the whole must be a good deal more than five millions. The debt, therefore, which, since the peace, has been paid out of the savings from the ordinary revenue of the state, has not, one year with another, amounted to half a million a-year. The sinking fund has, no doubt, been considerably augmented since the peace, by the debt which had been paid off, by the reduction of the redeemable four per cents to three per cents, and by the annuities for lives which have fallen in; and, if peace were to continue, a million, perhaps, might now be annually spared out of it towards