The Sun.
London, England, 1828-04-05 00:00:00

SINKING FUND.

EXTRACTS FROM AN ESSAY ON THE SUPPOSED
ADVANTAGES OF A SINKING FUND.

BY LORD GRENVILLE.

CHAPTER L, Section I.—Necessity of aSurphis

Revenue for the Support of a Sinking Fund.
Under no circumstances can any Sinking Fund be
productive of real benefit, except where the ordi-
nal.) income of the State has been carried to an
amount permanently exceeding its current expendi-
ture. The veriest prodigal may annually discharge
a part of what he owes ; but if, on the whole, he
expends within the year much more than he receives,
he will find, at its close, his incumbrances not les-
sened, but considerably increased. To reduce debt
is the only object of a Sinking Fund.
Section 2.—lnutility of borrowed Sinking Funds.
Can it be profitable to any man to buy up in the
open market his own engagements, with money
raised at the same moment, and in the same market,
by a, corresponding issue of similar securities'.'
Would not the mere fact of his resorting to such an
_ .

operation be more likely -to injure than to improve
his credit ? To reduce debt by borrowing to the
same amount, on terms of equal or greater disadvan-
tage, is a manifest fiction in finance.
Section 3.—lnefficacy of Sinking Funds operating

in War.

No Sinking Fund can truly exist, except in pe-
riods of peace. In war, no man expects that our
income will ever equal our expenditure ; how, then,
can it afford an excess of millions for the reduction
of debt? Whatever surplus may have been created
for that purpose in peace, a new war will at once
absorb; and, in that moment, vanishes all possibility
of benefit from the Sinking Fund.

Section 4.—Opposition of these Principles to those

of our present Sinking Fund.
Though first established in peace, and founded in
an assumed surplus of revenue, it has been nomi-
nally continued through long periods of war ; and,
during the far greater part of the more than forty
years of its existence, it has been either wholly or
partially supported by loans heaped on loans.
CHAPTER 11., Section I.—The direct Benefit de-
rived from this Fund consists in the release of pre-
♦iously appropriated taxation.
Our public debt consists not in capital, but in
annuities; and all reductions of it are therefore re-

Auctions, not of capital, but of annuities. That debt
is continually spoken of as if it were composed of
the nominal amount of our public securities ; but it
is really composed only of the annual payments gua-
ranteed by those securities. Nothing is debt except
what some person may, in justice or in equity, de-
mand; and no one can claim from the nation any
part of the principal of our public funds. The an-
nual income which the stockholder derives from them

is all which, in any sense, is his right; but that
right is inviolable. The State has not borrowed his
money at interest, under an obligation of repay-
ment, but has sold to him an annuity. To such a
transaction the words loans and debts, capitals and

interests, are not strictly applicable. It would now,
indeed, be a vain attempt to banish even from
our technical language a verbal inaccuracy so gene-
ral and so long established. But, in the study of
our national finance, the distinction itself is of
much importance. It has been very generally dis-
regarded, and its neglect has greatly complicated
these discussions, which for the public interest
could not have been made too simple. In private
concerns we find no such confusion. There, when
annuities are intended to be sold, that purpose is so
expressed ; when money is lent, under an obligation
of repayment, the Sum advanced constitutes its prin-
cipal ; its interest is computed at the rate truly
agreed upon by the parties; and its repayment at
such periods, definite or indefinite, as they have sti-
pulated, extinguishes the debt. In our public loans,
on the contrary, we create an imaginary capital, to
which we assign a fictitious rate of interest. A mil-
lion of money is advanced to us at a real interest,
suppose of six per colt. ; but we grant in return for
it two millions of stock, bearing an assumed interest
of three per cent. And we reserve to the State a
right of extinguishing that interest by a money-pay-
ment, not of one million, but of two. The substance
of such transactions, and their relative advantage to the
contracting parties, may, indeed, be presumed to be
little, if at all, varied by these embarrassed forms.—
Competition, wherever it freely operates, has a natural
tendency as certainly and as correctly to regulate
exchange in these, as in any more simple dealings.
But the fiction, if nugatory, is not therefore harm-
less. What fiction was ever harmless in finance ?
Many are the false reasonings, numberless and mon-
strous the projects of injustice, which originate only
in the misconception of these facts. What invidi-
ous comparisons do we not daily hear between the
sums actually advanced to the State by its creditors,
and the much larger amount of debt supposed to
have been created in their favour ! Had it been re-
membered that our debt consists only in annui-
ties, no such error could have been committed.
On this imaginary capital, swelled to whatever
amount, the stockholder has no claim. It serves
only to express the price at which the State may,
at its own convenience, redeem its engagements.
And this is an advantage reserved only to the
debtor. By the State it has been sometimes used
to lower the rate of these annuities; as when, on a
general fall of interest, the Five per Cents, have, by
a tender of repayment, been reduced to four, or the
Four per Cents. to three. But when interest rises,
the stockholder has not, like the private creditor, a
corresponding right of enforcing, by a demand of re-
payment, the proportionate increase of that annuity,
which, as we have seen, constitutes his whole pro-
perty in the debt.
Section 2.—The effective operations of this fund
are supported only by surplus taxation.
Section 3.--The reductions of debt thus effected
are mere exchanges of equivalents.
Section 4.—These results have in no degree been
varied by the application of compound interest to the
operations of this fund.
This whole matter of compound interest is, in-
deed, not a discovery in finance, but a mere ques-
tion of numbers. We are told how much debt will
in a given period be redeemed by a given annuity,
successively increased in a given ratio. And what
is this but a problem purely arithmetical ? It de-
pends on no principle of political economy. It
leaves untouched that which is, in such a case, the
main object of inquiry for any practical result.
These sums may be accurately calculated according
to their prescribed data ; we may by law appropriate
such payments to the Sinking Fund, whenever we
have the means of making them. But from what
source will they be derived, and by whom will their
charge be borne ? On these questions the account-
ant is silent ; can the statesman, therefore, overlook
them ? They are the very tests of the whole be-
nefit of his system, and decide in no small degree on
the possibility of its practical application. As fast
as any such fund accumulates, the annual taxation
must also accumulate from which it is to be defrayed.
If, instead of Price's two hundred millions of globes
of geld, each of so many thousand miles in dia-
meter, we could suppose his fund to have increased
only up to as many ounces of the same metal, the
taxes to be levied for it in a single year would fall
little short of the nominal capital of our present debt!
CHAPTER 11L—On the attempted Permanence and
repeated Interruption of this System.

Section I.—The expected Benefits of a Sinking
Fund at Compound Interest depend on its un-
varied Accumulation.
The first Sinking Fund, with all its strong Parlia-
mentary declarations and enactments of perpetuity,
was speedily diverted from its purpose. That of
1786 was again, with studied, but vain solicitude,
" fortified as much as possible against alienation."
Such were the words, such the hopes of Mr. Pitt ;
but in its real operation his system has now little
more of substantive existence than that which it re-
placed. And from these repeated failures there