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National Debt

NATIONAL DEBT. Details as to the recent figures of the national debts of individual countries are given under the heading of each country, and the reader is also referred to the article FINANCE. Here the subject is considered in its technical aspects including the special character of the institution, the different classes of debt, the various methods of raising loans, interest, funding systems, comparative statistics of national debts and other points.

National debt is so universal that it has been described as the first stage of a nation towards civilization. A nation, so far as its finances are concerned, may be regarded as a corporate body or even as an individual. Like the one or the other it may borrow money at rates of interest, and with securities, general or special, proportionate to its resources, credit and stability. But, while in this respect there are certain points of analogy between a state and an individual, there are important points of difference so far as the question of debt is concerned. A state, for example, may be regarded as imperishable, and its debt as a permanent institution which it is not bound to liquidate at any definite period, the interest, unless specially stipulated, being thus of the nature of transferable permanent annuities. While an individual who borrows engages to pay interest to the lender personally, and to reimburse the entire debt by a certain date, a state may have an entirely different set of creditors every six months, and may make no stipulation whatever with regard to the principal. A state, moreover, is the sole judge of its own solvency, and is not only at liberty either to repudiate its debts or compound with its creditors, but even when perfectly solvent may materially alter the conditions on which it originally borrowed. These distinctions explain many of the peculiarities of national debts as contrasted with those of individuals though a nation, like an individual, may by reckless bad faith utterly destroy its credit and exhaust its borrowing powers.

A well-organized state ought to have within itself the means of meeting all its ordinary expenses; where this is not the case, either through insufficiency of resources or maladministration, and where borrowing is resorted to for what may be regarded as current expenses, a state imperils, not only its credit, but, when any crisis occurs, its very existence; in illustration of this we need only refer to the cases of Turkey in Europe and some of the states of Central and South America. Even for meeting emergencies it is not always inevitable that a state should incur debt; its ordinary resources, from taxation or from state property, may so exceed its ordinary expenses as to enable it to accumulate a fund for extraordinary contingencies. This, it would seem, was a method commonly adopted in ancient states. The Athenians, for example, amassed 10,000 talents in the interval between the Persian and the Peloponnesian wars, and the Lacedaemonians are said to have done the same. At Susa and Ecbatana Alexander found a great treasure which had been accumulated by Cyrus. In the early days of Rome the revenue from certain sources was accumulated as a sacred treasure in the temple of Saturn; and we know that when Pompey left Italy he made the mistake of leaving behind him the public treasury, which fell into the hands of Caesar. In later times, also, the more prudent emperors were in the habit of amassing a hoard. We find that the method of accumulating reserves prevailed among some of the early French kings, even down to the time of Henry IV. This system long prevailed in Prussia. Frederick II., when he ascended the throne, found in the treasury a sum of 8,700,000 thalers, and it is estimated that at his death he left behind him a hoard of from 60 to 70 million thalers. And similarly, in our own time, of the five milliards of indemnity paid by France as a result of the Franco-German War, 150 millions were set apart to reconstitute the traditional war-treasury. The German empire, apart from the individual states which comprise it, had in 1882 a debt of about 24,000,000, while its invested funds amounted t 37>39 O > OO , including a war-treasure of 6,000,000. The majority of economists disapprove of such an accumulation of funds by a state as a bad financial policy, maintaining that the remission of a proportionate amount of taxation would be much more for the real good of the nation. At the same time the possession of a moderate war-fund, it must be admitted, could not but give a state a great advantage in the case of a sudden war. In the case of England, apart from the private hoardings of a few sovereigns, there does not seem to have existed any deliberately accumulated public treasure; before the time of William and Mary English monarchs borrowed money occasionally from Jews and from the city of London, but emergencies were generally met by " benevolences " and increased imposts.

All modern states, it may be said, have been compelled to have recourse to loans, either to meet war expenses, to carry out great public undertakings or to make up the recurrent deficits of a mismanaged revenue. Resources obtained in this way are what constitute national debt proper. Loans have been divided into forced and voluntary. Forced loans can, of course, only be raised within the bounds of the borrowing country; and, apart from the injustice which is sure to attend such an impost, it is always economically mischievous. The loans which the kings of England were wont to exact from the Jews were really of the character of forced loans, though the method has never been used in England in modern times so extensively as on the continent. There the sum sought to be obtained in this way has never been anything like realized. In 1793, for example, a loan of this class was imposed in France, on the basis of income; and of the milliard (francs) which it was sought to raise only 100 millions were realized. In Austria and Spain, also, recourse has been had at various times to forced loans, but invariably with unsatisfactory results. Other methods of a more or less compulsory character have been and are made use of in various states for obtaining money, which, as they involve the payment of interest, may be regarded as of the nature of loans; but the debt incurred by such methods is comparatively insignificant, and some of the methods adopted are peculiarly irritating and mischievous. On the other hand, it has occasionally been attempted to raise voluntary loans by appeals to a nation's patriotism; the method has been confined almost exclusively to France. After the revolutions of 1830 and 1848 appeals were thus made to the patriotism of French capitalists to buy 5% direct from the government at par, at a time when the French 5 % were selling at 80; but the results were quite insignificant. In short, the only economically sound method of meeting expenses which the ordinary resources of a state cannot meet is by borrowing in the open market on the most advantageous terms obtainable. On this normal method of borrowing, loans are divided into different categories, though there are really only two main classes, which may be designated perpetual and terminable. Borrowing in quasi-perpetuity has hitherto been the mode adopted by most states in the creation of the bulk of their debt. Not that any state ever borrows with the avowed intention of never paying off debts; but either no definite period for reimbursement is fixed, or the b'mit has been so extended as to be practically perpetual, or in actual practice the debt has been got rid of by the creation of another of equal amount under similar or slightly differing conditions as to interest. Of course a state is not bcund to retain any part of its debt as a perpetual burden; it is at liberty to liquidate whenever it suits its convenience. This quasi-perpetuity of debt in the case of a state in a sound financial condition involves no hardship upon its creditors, who may at any moment realize their invested capital by selling their titles as creditors in the open money market, it may be at the price they paid, or it may be a little below or a little above it, according to the state of the market at the time. Loans, again, contracted on the terminable principle are of various classes; the chief of these are (i) life annuities, (2) terminable annuities, (3) loans repayable by instalments at certain intervals, (4) loans repayable entirely at a fixed date.

From the time of William III. life and terminable annuities have been a favourite mode in England either of borrowing money or of commuting, and thus gradually paying off, the existing funded debt. At first, and indeed until comparatively recent times, the system of life annuities resulted in serious loss to the country, owing to the calculation of the rate of annuity on too high a scale, a result arising from imperfect data on which to base estimates of the average duration of life. The system of life annuities was sometimes combined in England with that of perpetual annuities, or interest on the permanent debt the life annuity forming a sort of additional inducement to lenders of limited means to invest their money. At one time the form of life annuities known as tontine was much in vogue both in England and France, the principle of the tontine being that the proceeds of the total amount invested by the contributors should be divided among the survivors, the last survivor receiving the whole interest or annuity. The results of this system were not, however, encouraging to the state. In England, at least, the terminable annuity has been a favourite mode of borrowing from the time of William III.; it has been generally conjoined with a low rate of permanent interest on the sum borrowed. Thus in 1700 the interest on the consolidated debt amounted to only 260,000, while the terminable annuities payable amounted to 308,407. In 1780 a loan of 12 millions was raised at 4% at par, with the additional benefit of an annuity of i, i6s. 3d. % for eighty years. Even so late as the Crimean War in 1855, a loan of 16 millions at 3% at par was contracted, the contributors receiving in addition an annuity of 143. 6d. % for thirty years.

The third method of contracting terminable loans, that of gradual repayment or amortization within a certain limit of years, has been a favourite one among certain nations, and specially commends itself to those whose credit is at a low ebb. When the final term of repayment is fixed upon, a calculation is easily made as to how much is to be paid half-yearly until the expiry of the term, so that at the end the whole, principal and interest, will have been paid. At first, of course, the amount paid will largely represent interest, but, as at each half-yearly drawing of the numbers of the bonds to be finally paid off the principal will be gradually reduced, there will be more and more money set free from interest for the reduction of the actual debt. This method, as we have said, has its advantages, and when conjoined with stipulations as to liberty of conversion to debt bearing a lower rate of interest than that originally offered, and when the bonds are not issued at a figure much below par, might be the most satisfactory method of raising money for a state under certain emergencies. What is known as the " Morgan loan " of France in 1870 was contracted on such conditions.

The last form of temporary loan,' that repayable in bulk at a fixed date, is one which, when the sum is of considerable amount, is apt to be attended with serious disadvantages. The repayment may have to be made at a time when a state may not be in a position to meet it, and so to keep faith with its creditors may have to borrow at a higher rate in order to pay their claims. It has, however, worked well in the United States, most of the debt of which has been contracted on the principle of optional payment at the end of a short period, say five years, and compulsory payment at the end of a longer period, say twenty years. Thus the loan of 515 millions of dollars contracted in 1862 was issued on this principle, at 6 %, and so with other loans between that year and 1868. In European states, however, the risks of embarrassment are too great to permit of the application of this method on an extensive scale; and for loans of great amount the methods most likely to yield satisfactory results are loans bearing quasi-perpetual interest, or those repayable by instalments on the basis of half-yearly drawings within a certain period.

What are known as lottery loans are greatly favoured on the continent, either as an independent means of raising money, or as an adjunct to any of the methods referred to above. These must not be confounded with the lottery pure and simple, in which the contributors run the risk of losing the whole of their investment. The lottery loan has been found to work well for small sums, when the interest is but little below what it would have been in an ordinary loan, and when the percentage thus set aside to form prizes of varying amounts forms but a small fraction of the whole interest payable. The principle is that each contributor of such a losin has a greater or less chance of drawing a prize of varying amount, over and above the repayment of his capital with interest.

What are known in England as exchequer bills and treasury bills may be regarded as loans payable at a fixed period of short duration, from three months upwards, and bearing very insignificant interest, even so low as \/ . They are a useful means of raising money for immediate wants and for local loans, and form handy investments for capitalists who are reserving their funds for a special purpose. Exchequer bonds are simply a special form of the funded debt, to be paid off generally within a certain period of years.

There are two principal methods of issuing or effecting a loan. Either the state may appeal directly to capitalists and invite subscriptions, or it may delegate the negotiation to one or more bankers. The former method has been occasionally followed in France and Russia, but in practice it has been found to be attended with so many disadvantages to the borrowing state or city that the best financial authorities consider it unsound. The great bankinghouses have such a command over the money-market that it is difficult to keep even a direct loan out of their hands. The majority pf loans, therefore, are negotiated by one or more of these houses, and the name of Rothschild is familiar to every one in connexion with such transactions. By this method a borrowing state can assure itself of having the proceeds of the loan with the least possible delay and with the minimum of trouble. A loan may be issued at, above, or below par, though generally it is either at or below par " par " being the normal or theoretical price of a single share in the loan, the sum which the borrowing government undertakes to pay back for each share on reimbursement, without discount or premium. Very generally, as an inducement to investors, a loan is offered at a greater or less discount, according to the credit of the borrowing government. Sometimes a state may offer a loan to the highest bidders; for example, the city of Auckland in 1875 invited subscriptions through the Bank of New Zealand to a loan of 100,000 at 6%; offers were made of six times the amount, but only those were accepted -which were at the rate of 98% or above. The rate of interest offered generally depends on the credit of the state issuing the loan. England, for example, would have no difficulty in raising any amount at 3 % or even less, while less stable states may have to pay 8 or 9%. The nominal percentage is by no means, however, always an index of the cost of a loan to a state, as the history of the debt of England disastrously shows. During the 18th century various expedients were employed, besides that of terminable annuities already referred to, to raise money for the great wars of the period, at an apparently low percentage. For example, from 3 to 5% would be offered for a loan, the actual amount of stock per cent, allotted being sometimes 107 J or even in; so that between 1776 and 1785, for the 91,763,842 actually borrowed by the government, 115,267,993 was to be paid back. In 1797 a loan of 1,620,000 was contracted, for every 100 of which actually subscribed, at 3%, the sum of 219 was allotted to the lender. In !793 a 3% loan of 4j millions was offered at the price of 72 %, the government thus making itself liable for 6,250,000. Greatly owing to this reckless method the debt of Great Britain in 1815 amounted to over 900 millions. France in this respect has been quite as extravagant as England; many of her loans during the 19th century were issued at from 52$ to 84%, one indeed (1848) so low as 45 % as a rule with 5 % interest. The enormous and embarrassing increase of the French debt during the 19th century was doubtless greatly due to this disastrous system. Nearly every European state and most of the Central and South American states have at one time or another aggravated their debts by this method of borrowing, and got themselves into difficulty with their creditors. Financiers almost unanimously maintain that in the long run it is much better for a state to borrow at high interest at or near par, than at an apparently low interest much below par. A state of even the highest rank may find itself in the midst of a crisis that will for a time shake its credit; but when the crisis is past and its credit revives it will be in a much more sound position with a high interest for a debt contracted at par than with a comparatively low interest on a debt much in excess of what it really received. If a state, for example, borrows at par at 6% when its credit is low, it may easily when again in a flourishing condition reduce the interest on its debt to 4 or even 3 %. The United States government actually did so with the debt it had to contract at the time of the Civil War. This method of reducing the burden of a debt is evidently no injustice to the creditors of a government, when used in a legitimate way. A state is at liberty at any time to pay off its debts, and, if it can borrow at 3% to pay off a 6% debt, it may with perfect justice offer its creditors the option of payment of the principal or of holding it at a reduced interest. Government debts are, however, sometimes reduced after a fashion by no means so legitimate as this. Other states have been even more unprincipled, and have got rid of their debts at one sweep by the simple method of repudiation.

When a state has a variety of loans at varying rates of interest, it may consolidate them into a single debt at a uniform interest. For example, in 1751 several descriptions of English debt were consolidated into one fund bearing a uniform interest of 3 %, an operation which gave origin to the familiar term " consols " (" consolidated annuities "). In the early days of the English national debt, a special tax or fund was appropriated to the payment of the interest on each particular loan. This was the original meaning of " the funds," a term which has now come to signify the national debt generally. So also the origin of the term " funded " as applied to a debt which has been recognized as at least quasi-permanent, and for the payment of the interest on which regular provision is made. Unfunded or floating debt, on the other hand, means strictly loans for which no permanent provision requires to be made, which have been obtained for temporary purposes with the intention of paying them off within a brief period. Exchequer and treasury bills are included in this category, and such other moneys in the hands of a government as it may be required to reimburse at any moment. Where a government is the recipient of savings banks deposits, these may be included in its floating debt, and so also may the papermoney which has been issued so largely by some governments. A state with an excessive floating debt must be regarded as in a very critical financial condition.

National debt, again, is divided into external and internal, according as the loans have been raised within or without the country some states, generally the smaller ones, having a considerable amount of exclusively internal debt, though it is obvious that the bulk of national debts are both external and internal.

We referred above to various ways of reducing the burden of a debt, and also to methods of contracting loans by which within a certain period they are amortized or extinguished. Most states, however, are burdened with enormous quasi-permanent debts, the reduction or extinction of which gives ample scope for the financial skill of statesmen. A favourite method of accomplishing this is by the establishment of what is known as a sinking fund, formed by the setting aside of a certain amount of national revenue for the reduction of the principal of the debt. (J- S. K.)

The following table shows the general state of the world's public indebtedness at the beginning of the 20th century, divided according to the more important countries, the bracketed figures in black type indicating the position of the country referred to under each heading in the list. The figures are given by preference for the year 1900, as more representative, in a case like this, than for some later years; for the Boer War, as regards the United Kingdom, and also the Russo-Japanese War, introduced new debt and new considerations, hardly fair to the comparison, while this stands at the end of a long period of peace. The figures in every case are not to be supposed to be absolutely accurate; statistics of national debts differ, often remarkably, and it is practically impossible to give a perfectly satisfactory comparison, owing partly to difficulties of computing the exchange, partly to inaccurate accounts, and partly to the varieties of debt (reproductive or non-reproductive, etc.).

Kingdom (756 millions) stood second to that of France (1000 millions), in 1900 it stood third to France and Russia; whereas in 1883 its weight per head of population was third, in 1900 it was eleventh; whereas in 1883 its annual charge stood second, in. 1 900 it stood fourth; and whereas the weight of the charge per head of population in 1883 was fifth, in 1900 it was eleventh. The indebtedness of the great British dependencies, on the other hand, had increased from 302 millions to 544 millions sterling, or by 242 millions; and the local (municipal) debt of Great Britain had risen from about ico millions to upwards of 300 millions.

It is interesting to recall the history of the British national debt during the 19th century. The debt at the close of the Napoleonic war (1816) was nearly 887 millions sterling, History and at the beginning of 1900 this debt had been of reduced to 621 millions, 1 or a decrease of 266 millions British notwithstanding interim additions of about 367 ***" millions, which made the gross reduction during that period 633 millions sterling, an amount actually larger than the whole (dead- weight 2 ) debt at the end of the century. No country (except the United States, to a smaller amount) has ever redeemed its obligations on such a scale, and this was done while all other European countries of similar standing were piling up debt.

This enormous reduction was effected at different rates of speed. Between 1817 and 1830, when what was known as The Principal Public Debts of the World, The total indebtedness of the countries named in the table amounted to 6,311,017,478, and the total indebtedness of the world (i.e. including countries not here mentioned) for the year 1898 was computed by Lord Avebury (Journ. Roy. Slat. Soc. vol. briv. part i.) as 6,432,757,000, as against 5,097,910,000 in 1888. This compares (taking figures compiled by Mr Dudley Baxter in Journ. Roy. Stat.Soc., March 1874) with a total indebtedness of 4680 millions sterling in 1874 and 1700 millions sterling in 1848. The United Kingdom had diminished its total debt since 1883 by 127 millions, the amount per head by 6, the annual charge by 6 millions, and the charge per head by 55. 8d. The United States debt was lower by nearly a hundred millions. Japan, Egypt and Brazil had sensibly improved their positions. But the following countries had increased their debts: France (by 86 millions), Russia (by some 240 millions), Italy (by 140 millions), Austria-Hungary (by 70 millions), Spain (by 190 millions), Prussia (by 227 millions), Portugal (by 80 millions), Holland (by 18 millions), Belgium (by 32 millions), and Argentina (by 73 millions).

The result is that, whereas in 1883 the total debt of the United Pitt's sinking fund was in operation (depending upon the devotion of surplus income to the repayment of debt, but much complicated by the raising of fresh loans), a net reduction was made of 29,488,072 an annual average of 2,268,313. From 1830 to 1876 the system of using surplus revenue the so-called old sinking fund for redeeming debt, was steadily applied, together with the creation of terminable annuities, by which definite blocks of debt were cancelled and the whole amount paid off in a term of years. During this period the debt was reduced by 85,175,782, an annual average of 1,851,647. In 1876 Sir Stafford Northcote's (Lord Iddesleigh's) new sinking fund came into operation, in addition to previous methods of redeeming debt. By this system a definite annual sum was set aside for the service of the debt, the difference between it and 1 Leaving out of account 8 millions of unfunded debt raised for the Boer War.

1 The " dead-weight " debt, or national debt proper, excludes what are treated in the public accounts as "other capital liabilities," the interest on which is not included in the fixed charge; but it is taken to include the new debt of all sorts raised in 1900, 1901 and 1902 for the Boer War.

the amount required for payment of interest forming a (new) sinking fund devoted to repayment of capital. This fixed charge was gradually reduced from about 29 millions to 26 millions in 1888, to 25 millions in 1890, and to 23 millions in 1899. The amount paid off during this period by means of old sinking fund, terminable annuities and new sinking fund, down to March 1900, was 155,238,639, or an annual average of 6,468,276.

It will be observed that the burden of the debt incurred previously to 1817 has thus been borne very unequally by different ages of " posterity." While the generations immediately succeeding the Napoleonic war paid off about 2,000,000 a year, the taxpayers between 1876 and 1900 paid at three times that rate. They did so largely without knowing it, since a large part of the amount was wrapped up in the terminable annuities; but it is very questionable justice that so large a proportion of the burden should have been imposed upon them.

The great bulk of the funded national debt consists of what are known as " consols." This name dates from 1751, when nine different government annuities at 3% were consolidated into one, amounting to 9,137,821. These " consolidated annuities " formed the germ of what has since become the type of British government stock. At the same time some of the annuities at a higher rate of interest were combined and the interest reduced to 3%, and this stock was known as " reduced," the two 3% stocks remaining side by side, until in 1854 the 3j% government stock was also converted into 3%, under the style of "new threes." "Consols," "reduced" and "new threes" formed thenceforth a solid body of British 3% stock, until in 1888 the whole amount was converted (see Conversions below) by Mr ( afterwards Lord) Goschen into 2j%. "Consols" were added to from time to time when fresh loans were needed: from 39 millions in 1771 they rose to 71 millions in 1781, to 101 millions in 1783, 278 millions in i&oi, 334 millions in 1811, and 400 millions in 1858; but in 1888 they had decreased, by redemptions, to 322,681,035. " Reduced " were also added to: from 17 millions in 1751 they rose to 164 millions in 1815, and then gradually Consols.

amount more was practically locked up by being held by trustees, or by banks, insurance societies, etc. The savings banks deposits, increasing as they did by about 1,000,000 per month (owing partly to the raising in 1894 of the maximum limit), had to be invested in government securities; and the compulsory activity of the government as a buyer of consols, both on this account and also for sinking fund purposes (in order to obtain stock to redeem debt on the increased scale already indicated) operated as an abnormal cause for sending the price of consols high above par. Even at that figure (the average prices for consols being loij'j in 1894, 1065 in 1895, 119! in 1896, ii2j| in 1897, nojjj in 1898 and io6J having fallen owing to war prospects in 1899) it was difficult for the government brokers to obtain consols, and it was principally owing to this state of things that in 1899 Sir Michael Hicks-Beach reduced the fixed annual charge for the debt (and pro tanto the new sinking fund) from 25,000,000 to 23,000,000.

It may be useful to give the figures for the British natipnal debt in 1902, after the disturbance due to the South African War. During the years 1900 and 1901 the new sinking fund was suspended, as well as the payments on the terminable annuity debt applicable to repayment of capital (except in so far as annuities to individuals were concerned) ; so that the debt was not reduced, as it would otherwise have been, by 4,547,000 in 1900 and by 4,681,000 in 1901. On the contrary, it was increased by fresh borrowings. Consols were raised (in 1901 and 1902) to the extent of 92,000,000; a " War Loan " of 2$% stock and bonds, redeemable in 1910, was raised (1900) to the amount of 30,000,000; 2j% exchequer bonds were raised (in 1900) to the amount of 24,000,000, and treasury bills (in 1899 and 1900), 13,000,000. The total war borrowing amounted accordingly to 159,000,000, raised at a discount of (6,585,000) 4-14%. This includes the whole new borrowing in 1902, a portion of which was intended after the peace to be paid back in the current year; but for this no allowance can here be made. The accompanying table shows the totals for the " dead-weight debt " in 1900, 1901 and 1902, and, for convenience, also the " other capital liabilities."

"Dead- weight Debt."

Chief Cause of Difference. ' " Other Liabilities."

31stMarch 1900 . 1901 . .

1902 . July 1902 . .

628,978,782 690,992,621 747,876,000 779,876,000 ( +" War Loan," 30,000,000 ] -t-Exch. Bonds, 24,000,000 ( -j-Treas. Bills, 5,000,000 + Consols, 60,000,000 -(-Consols, 32,000,000 10,186,482 14,731,256 20,532,000 diminished to 102 millions in 1869, and to 68,912,433 in 1887, when they were converted with " consols " into the new consols (or " Goschens ") at 2$%, to be reduced to 2|% in 1003.

The lowest price ever quoted for " consols " was 47! on 20th September 1797, owing to the mutiny at the Nore; the highest was 114 in 1896 owing t6 scarcity of stock, the operation of the sinking funds, and the demand for investment of savings bank moneys.

The high premium to which consols rose towards the end of the century may be briefly explained. Pari passu with the reduction of the debt went a dwindling of the amount of consols open to investors, and hence occurred a continued normal appreciation of the stock. In 1817 the amount of British government stock per head of the population was 40, IDS.; in 1896 this figure had decreased to 14, I2s. The ordinary law of supply and demand would therefore in any case tend to increase the price of government stock. This has always happened. The amount of 3% diminished from 528 millions in 1817 to 498 in 1827, and to 497 in 1837, and the average prices in these years were 73, 83 and 90; additions were made to the stock, and in 1847 (the amount being 510 millions) the price was 86f; again the amount decreased, and in 1852 (500 millions) the price was 98 ; then a great conversion raised the amount to 734 millions in 1854, and the price went down to 90$ ; but by 1887 the amount decreased by about 200 millions, and the price rose well above par; and though the reduction in interest in 1888 set back the price, it rose again as the amount of available stock diminished. Many causes, into which it is not necessary to enter, operated no doubt in keeping up the demand for British government credit. Moreover, apart from the fact that in 1882 there were 689 millions of 3% and in 1900 only 501 millions of 2f% in existence, the amount held by government departments and therefore practically locked up from the market, gradually increased, until from this cause alone the amount of available stock was diminished by upwards of 200 millions; and a large " Other liabilities " it must be remembered, represent money advanced (generally by terminable annuity) on reproductive objects telegraphs, barracks, public works, Uganda railway, etc. and they could not, obviously, be properly included in the national debt unless at the same time a set-off were made for the valuable assets held by the British government, such as the Suez canal shares, which in 1902 were alone worth upwards of 26,000,000. (H. CH.)

British National Debt Conversions. The great bulk of the funded debt of the United Kingdom consists of annuities, which are described as perpetual, because the state is under no obligation to pay off at any time the capital debt which they represent. All that the public creditor can claim is to receive payment of the instalments of annuity as they fall due. On the other hand, the government has the right to redeem the annuities ultimately by payment of the capital debt; though it may, and frequently does, bind itself not to exercise that right as regards a particular stock of annuities until after a definite period. So long as a stock is thus guaranteed against redemption, the only way in which the annual charge for that portion of the debt can be reduced is by the government buying back the annuities in the open market at their current price, which may be more or may be less than the nominal debt, according to general financial conditions and to the state of the national credit. The liability of the stock to redemption at par, when the period of guarantee has expired, prevents its market price from rising materially above that level. To enable the right of compulsory redemption to be enforced, it is only necessary that the government should 1 Other causes are redemption of land tax, variation in capital value of terminable annuities and minor treasury operations.

have command of sufficient funds for the purpose of paying off the stockholders, or should be able to raise those funds by borrowing at a rate of interest lower than that borne by the stock. Any circumstances which might tend to raise the price of the stock above par would also assist the government in raising its redemption money on more favourable terms. When the amount of stock to be dealt with is large, the raising by a fresh loan of the amount required for redemption would occasion great disturbance. A more convenient method is the conversion of the existing stock to a lower rate of interest by agreement with the stockholders, whose reluctance to accept a reduction of income is overborne by their knowledge that the power of redemption exists and will be put in force if necessary. The opportunity for conversion may be looked for when the price of a redeemable stock stands steadily at or barely above par. Observation of the movements' in the price of other securities will serve to show whether this stationary price represents the real market value of the stock, or whether that value is subject to depression owing to an expectation of the stock being converted or redeemed. Accordingly, the course of prices of other government stocks which are free from the liability to redemption, of the stocks of foreign countries and the colonies, and of the large municipalities, must be watched by government in order to determine, first, whether the conversion of a redeemable stock is feasible, and, secondly, to what extent the reduction of the interest in the stock may be carried.

The credit for the first measure of conversion belongs to Walpole, though it was carried through by Stanhope, his successor as chancellor of the exchequer. In 1714 the legal rate of interest for. private transactions, which had been fixed at 6% in the year of the Restoration, was reduced to 5% by the act 12 Anne, stat. 2, c. 16. But the bulk of the national debt still bore interest at 6%, the doubtful security of the throne and the too frequent irregularities in public payment having hitherto precluded any considerable borrowing at lower rates. Walpole saw that the first requirement was to give increased confidence to the public creditors. Three acts were passed dealing respectively with debts due to the general public, to the Bank of England and to the South Sea Company. Three separate funds the general fund, the aggregate fund and the South Sea fund were assigned to the service of the several classes of debt, each of these funds being credited with the produce of specified taxes, which were made permanent for the purpose; and it was further provided that any surplus of the funds, after payment of the interest of the debts, should be applied in reduction of the principal. Such was the success of this measure that, in spite of the reduction of interest from 6 to 5% which was also enacted, the passing of the acts was followed by a rise in the price of stocks. A curious preliminary to the introduction of these measures was the passing of a resolution by the House of Commons, which invited advances not exceeding 600,000, to be repaid with interest at 4% out of the first supplies of the year. The result showed that the time was not ripe for such a reduction of interest, as only a sum of 45,000 was offered on those terms. A further resolution was then passed, substituting 5 % as the rate of interest, and the whole sum was at once subscribed. Besides accepting the reduction of interest on their own debts, the Bank of England and the South Sea Company agreed to assist the government by advancing 4$ millions at the reduced rate, to be employed in paying off any of the general creditors who might refuse assent to the conversion. The assistance was not required, as all the creditors signified assent. The debts thus dealt with amounted altogether to about 25$ millions, and the annual saving of interest effected (including that upon a large quantity of exchequer bills for which the Bank had been receiving over 7 %) was 329,000.

Walpole had a further opportunity of effecting a conversion in 1737. In the meantime much of the 5% debt had been reduced to 1749 ^ *f* ky arrangements with the Bank of England and the South Sea Company, and further borrowings had taken place at that rate and even at 3%. In 1737 the 3% stood above par, and Sir John Barnard proposed to the House of Commons a scheme for the gradual reduction of the 4 %. As a financial measure the scheme would doubtless have succeeded; but Walpole, moved apparently by consideration for his capitalist supporters, opposed and for the time defeated it. A scheme on similar lines was carried through by Pelham as chancellor of the exchequer in 1749 and embodied in the act 23 Geo. II. c. I. By that act holders of the 4% securities, amounting to nearly 58,000,000, were offered a continuance of interest at 4% for one year, followed by 3^ % for seven years, during which they were guaranteed against redemption, with a final reduction to 3 % thereafter. It was necessary to continue the rate of 4 % for the first year, as any objecting stockholders could not be paid off without a year's notice. Three months were allowed for signifying assent to the proposal. At first it was viewed with disfavour, and both the Bank and the East India Company opposed it. But the pens of the government pamphleteers were busily occupied in showing the advantages of the offer, and at the close of the three months acceptances had been received from the holders of nearly 39,000,000 of the stocks, or more than two-thirds of the whole. A further opportunity was afforded to waverers by a second act (23 Geo. II. c. 22), which allowed three months more for consideration; but for holders accepting under this act the intermediate period of 3J% interest was reduced from seven years to five. These terms brought in an additional 15,600,000 of stock; and the balance left outstanding, amounting to less thanj 3 J millions, was paid off at par by means of a new loan. The annual saving of interest on the stock converted was at first 272,000, increasing to 544,000 after seven years.

For nearly three-quarters of a century no further conversion was attempted. In that period the total debt had been increased tenfold, and the practice of borrowing in times of war by the issue of an inflated capital, bearing nominally a low rate of interest, prevented recourse to conversion as a means of reducing the burden after peace was restored. But in 1822 Mr Vansittart who four years earlier had effected a conversion in the opposite direction, turning 27,000,000 of stock from 3 inio 3 j %, in order to obtain from the holders an advance of 3,000,000 without adding to the capital of the debt was able to deal with the 5 %. These stocks amounted to 152,000,000 out of a total funded debt of 795,000,000. The prices at which the chief denominations of government stocks stood in the market in the early part of 1822 indicated a normal rate of interest ot more than 4 but considerably less than 4i%. In these circumstances, to propose the conversion of the 5 % stocks to 4i % would probably have been futile, unless the new stock were guaranteed for a long period, as holders would have stood in fear of a speedy further reduction. Nor could the government hope to succeed in a reduction to 4%. Mr Vansittart's plan was to offer 105 of stock bearing 4 % in exchange for 100 of 5 % stock, thus adding slightly tojthe capital of the debt, but effecting a large annual saving in interest. These terms were highly successful. Holders of nearly 150,000,000 accepted, leaving less than 3,000,000 of the stock to be paid off, and the annual saving obtained was 1,197,000. The new 4 % stock was made irredeemable for seven years (act 3, Geo. IV c. 9).

There were, however, other 4 % stocks, amounting to 76,000,000, which were not secured against redemption. Two years later, the conditions being favourable for their conversion, the act 5 Geo. IV. c. 24 was passed, offering holders in exchange a 3i % stock, irredeemable for five years. The offer was accepted as regards 70,000,000, and the remaining 6,000,000 paid off, the annual saving on interest being 381,000.

In 1830 the guarantee given to the 4% stock of 1822 had expired, and the stock stood at a price of 1025. Mr Goulburn decided to attempt its conversion without delay, and accordingly by the act ii Geo. IV. c. 13 holders were offered in exchange for each 100 of the stock, either 100 of a 3! % stock, irredeemable for ten years, or 70 of a 5 % stock, irredeemable for forty-two years, these two options being considered of approximately equal value. No difficulty was found in securing assent. Over 150,000,000 of the stock was converted, almost wholly into the 3i % stock; the balance of less than 3,000,000 was paid off, and an annual saving of 754,000 in interest was the result.

It was again Mr Goulburn's fortune to carry out a large and successful conversion in 1844. At that date the funded debt was made up of 3 % and ji % stocks in the proportions of about two to one, the only other denomination being the trifling amount of 5 % stock created in connexion with the conversion of 1830. The price of 3% consols ranged about 98, and that of the new 3i%, created in 1830, about 102. A reduction straightway from 3i to 3% was not to be looked for, but it was hoped to ensure that reduction ultimately by offering 3i% for the first few years and a guarantee against redemption for a long term. Accordingly the holders of the several 3? % stocks were offered an exchange to a new stock bearing interest at 3} % for ten years and at 3 % for the following twenty years. Practically the whole of the stock, amounting to 249,000,000, was converted on these terms, only 103,000 being left to be paid off at par. The immediate saving of interest was 622,000 a year for ten years, and twice that rate in subsequent years (acts 7 & 8 Viet. cc. 4 and 5).

Mr Gladstone's only attempt at the conversion of the debt was made in his first year as chancellor of the exchequer. His primary purpose was to extinguish some small remnants of 3% stocks which stood outside the main stocks of that de- ' nomination. The act 1 6 Viet. c. 23 offered to holders of these minor stocks, amounting altogether to about <)\ millions, the option of exchanging every 100 for either 82, los. of a 3J % stock guaranteed for 40 years, or no of a 2^% stock guaranteed for the same period, or else for exchequer bonds at par. In the result stock to the amount of only about 1,500,000 was converted, and the remaining 8,000,000 had to be paid off at par, with some apparent loss of capital, as the current market price of the 3 % was less than par. The failure w?s largely owing to the fact that, between the initiation and the execution of the scheme, the train of events leading up to the Crimean War had become manifest, with unfavourable results to the public credit. Mr Gladstone had also included, as an optional portion of his plan, liberty to holders of the larger 3% stocks to exchange into the new 3j and 2j%. Very little advantage was taken of this permission, but the small amount of 2j% stock then created has been largely added to in later years by the conversion of stocks of higher denominations held by the national debt commissioners for the savings banks and other government funds.

Little better was the result of a more ambitious attempt made by Mr Childers in 1884. His offer (act 47 & 48 Viet. c. 23) extended 1884 to t ' le holders of all the 3 % stocks, amounting to more than 600 millions, but no attempt was made to compel acceptance. There was offered in exchange for each 100 of 3% stock either 102 of a stock at 2 J % or 108 of a stock at 2 J %, both irredeemable for twenty-one years. But the amount exchanged into the new stocks was only 22 millions, of which more than onehalf was stock held by government departments.

The most important of all the conversions of the British debt was effected by Mr Goschen in 1888. It applied to the whole of the 3 % 1888 stocks, amounting to a total of 558,000,000, made up as follows: 323,000,000 of consols, a stock which dated from 1752, when it was formed by the consolidation of a number of minor stocks; 69,000,000 of reduced 3%, of which the nucleus was the stock reduced from 4 to 3% by Pelham's conversion in !749; 166,000,000 of new 3% resulting from the conversion of 1844. All the three stocks were, and had been for a considerable time, well over par. But for the past few years they had remained in almost a stationary position, relatively to the upward movement shown in the prices of the government 2j% stock, and of the stocks of foreign governments, of British colonies and of the leading municipalities. It was clear that the anticipation of a conversion or redemption scheme was weighing down consols. Direct evidence of this fact was afforded by the course of a new 3% stock, the local loans stock, which Mr Goschen had created in 1887. Though bearing the same interest and resting upon the same ultimate security as consols, this stock, which had been made irredeemable for twentyfive years, rose at once to a higher level of price. The opportunity for a great scheme of conversion had evidently come. The risk to be incurred by government in undertaking the liability to pay off such an enormous body of stock, though Iqss in comparison with the resources of the nation than that which Mr Goulburn had faced in 1844, was still very great, and it was rendered more formidable by the fact that holders of consols and of reduced 3% were entitled at law to a year's notice before their stocks could be redeemed. If that right of notice were to be enforced as regards any large proportion of the stocks, no precaution could adequately guard against the risk of untoward circumstances arising to affect the operation before the year expired. Mr Goschen proposed to offer to the holders of each of the three stocks an exchange at par into a new stock bearing interest at 3 % for the first year, at 2f % for the next fourteen years and at 2$ % for twenty years thereafter, the stock to be irredeemable for the whole of that period, namely till 1923. Acceptance was made compulsory for holders of the new 3 %, with the alternative of being paid off at par, as they had no claim to receive notice; but it was made optional for the holders of the other two stocks, and a bonus of 53. % was offered to them as an inducement to forgo their right of notice. These provisions were duly embodied in the act 51 Viet. c. 2. The terms were accepted by practically all the holders of the new 3 % and by the great majority of the holders in consols and reduced 35, the amount left outstanding being only 42,000,000. To enable that balance to be dealt with, an act was passed providing for the compulsory redemption or conversion of the outstanding stock at the expiry of the statutory notice. The funds required for this further operation were raised by the issue of treasury bills and exchequer bonds, by temporary advances from the bank and from the national debt commissioners, and by the creation of an additional half-million of the new stock. In the result it was only necessary to find cash for paying off dissentients to the amount of 19,000,000. The final outcome of the whole operation was a saving in the annual charge of interest of 1,412,000, increasing to twice that amount after fourteen years.

The conversion of the consols and reduced 3% was greatly facilitated by the exercise of a power, which the act conferred, to pay to recognized agents, such as stockbrokers, bankers and solicitors, a commission of is. 6d. % on stocks in respect of which they lodged their clients' assents. These agents were thus afforded an inducement to give their clients explanation and advice, without which many of the fundholders would probably not have moved in the matter. The commissions paid amounted to more than 234,000, representing stocks to the amount of over 312,000,000. The government would not again be confronted with this difficulty of having to give long preliminary notice of the intention to convert or redeem a large portion of the debt, as it was provided by the Conversion Act 1888 that the present consols should be redeemable after 1923 on such notice and in such manner as parliament might direct. (W. BL.; E. W. H.*)

See Leroy-Beaulieu, Traile de la Science des Finances; Rau, Finanzwissenschaft; M'CulIoch, On Taxation and the Funding System; Hamilton, Inquiry concerning the Rise and Progress of the English Debt; Taylor, History of Taxation in England; Fenn, Compendium of English and Foreign Funds; Dudley Baxter, National Debts, and his paper in the Stat. Soc. Jour. (1874). ; Sir E. W. Hamilton, Conversion and Redemption (1889). And for statistics of national debts see the Statesman's Year-Book and the Stock Exchange Annual.

Note - this article incorporates content from Encyclopaedia Britannica, Eleventh Edition, (1910-1911)

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