The History Of The English Debt.

THE longest and in many respects the most in-
structive history of a continuous national debt is that
supplied by Great Britain. The earlier attempts at
systematic borrowing in Italy and Holland have ceased to
have any practical effect, but the present English debt
shows an unbroken record of 200 years. The Stuarts had
not paid much respect to their obligations, and were quite
prepared to repudiate inconvenient liabilities. Still, the
expansion of the public economy made it impossible to
avoid some floating charges. At the completion of the
Revolution in 1689 the debt stood at a little over one
million (1,054,925); in 1691 it had risen to 3,130,000,
bearing an interest charge of 232,000. An Act was passed
in the next year which is regarded by Macaulay as the
origin of the National Debt, and which provided that
1,000,000 should be borrowed on the security of the beer
and other liquor duties. The yield of these taxes was to
form a fund for the payment of interest, with the proviso
that as each subscriber died his annuity was to be divided
among thesurvivors until their number was reduced to seven,
when as each annuitant died his share would lapse to the
State 1 . The necessities of the war with France compelled
further borrowing. The funded debt is first mentioned in
1694. In that year the Bank of England was founded,

1 Macaulay, Hist, of England, ii. 398.



552 PUBLIC FINANCE. [BOOK V.

and lent its subscribed capital, 1,300,000, to the Govern-
ment at the, under the circumstances, moderate rate of
8 per cent, which with an allowance of 4000 for manage-
ment, made a total charge of 100,000 per annum. The
connexion thus formed between the Bank and the Whig
party continued as an influence in politics for several
years 1 .

At the Peace of Ryswick (1697) the debt had reached
31,500,000^ which in the four succeeding years of peace
was reduced to 16,400,000. The East India Company
had lent 3,000,000 at 8 per cent, in 1698, but this was
applied to paying other obligations. There was thus a
reduction of about 1,350,000 per annum during peace, as
against the increase of 3,500,000 per annum during the
longer war period, a state of things that we shall find
repeated at several subsequent stages of the history.
During the war of the Spanish Succession the debt rose
at the rate of over 3,000,000 yearly, until at the Peace
of Utrecht (1713) it came to 53,680,000 2 .

During the peace period, which, with a couple of slight
exceptions, extended from 1713 to 1739, the movement of
the debt was not uniform. In the first ten years, owing to
the South Sea Bubble, the war with Spain, and the method
of dealing with taxation, the debt became 55,300,000.
Then during the remaining sixteen years of peace, with the
prudent administration of Walpole, some reduction was
made, so that in 1740 the amount was just under
47,000,000, or an annual diminution of 500,000.

1 Macaulay, Hist. ii. 479 ; Rogers, First Nine Years of the Bank of
England, xiii, xiv.

2 One curious item, the oldest of all and hence sometimes regarded as the
origin of the debt, was added in 1706. The Cabal Government of Charles II
had in 1671 seized on the Goldsmiths' loans
to the Exchequer, a proceeding
known as the ' shutting of the Exchequer,' and had simply paid interest on the
amount of 1,328,000 detained. In 1683 even the interest was stopped. Legal
proceedings were taken by the sufferers, and after a series of trials the. House of
Lords decided in their favour ; but by an Act of 1699 it was provided that after
December 25th, 1705, one-half of the amount (664,000) should be added to
the existing debt, to bear interest at 6 per cent.



CHAP. III.] THE HISTORY OF THE ENGLISH DEBT. 553

2. This first half-century of the debt's existence
presents several points of financial interest. The effect of
war in adding to debt, to be a little reduced in the succeed-
ing peace, has been noticed. A more important feature
is the gradual introduction of funded debt. Annuities,
tontines, anticipations of taxes, and floating or temporary
liabilities tend to be absorbed in the now established
form of capital advances for interest. The various
separate debt accounts become blended in one indis-
tinguishable charge. 'The Aggregate Fund was estab-
lished in 3715 and the South Sea and general Funds
in the following year. To each of these funds a variety
of branches of revenue were appropriated . . . and each
of them was charged with the payment of certain annuities
then due by the public. The united surplus of these funds
formed the basis of the sinking fund established in 1716 V
This is the first appearance of the system which, at a later
time and in a different form, was regarded as the most
effective agency for reducing debt The primitive sinking
fund usually called * Walpole's ' was really due to Stanhope.
It proved of little service for the purpose it was applied to,
as it depended on the existence of a surplus whether debt
would be redeemed, and the contraction of new liabilities
would always render nugatory the payments made towards
redemption.

The first instances of the process known as ' conversion '
also occur in this period. In 1714 the legal rate of interest
had been reduced from 6 per cent, to 5 per cent., and
three years later a like reduction was made on the interest of
the public debt. Again in 1727 a further reduction from
5 per cent, to 4 per cent, was made, by which a saving
of ^400,000 per annum was realized. The effect of
Walpole's financial management is shown by the high
price that the funds had reached. A 3 per cent, loan
issued in 1727 stood at par in 1736, and in the next year
at 107. Under such conditions it is plain that the whole

1 Hamilton, 64.



554 PUBLIC FINANCE. [BOOK V.

redeemable debt might have been reduced to 3 per cent,
or even lower. Political expediency, which made it an
object to favour the fundholders, who were strong sup-
porters of the Hanoverian dynasty, prevented this useful
measure.

3. The war of 1739-48 had the usual effect on the
state indebtedness. After the conclusion of peace it was
found that 31,300,000 had been added to the previous in-
cumbrances, bringing the total amount to over 78,000.000.
The return of peace gave an opening for the application
of financial management. Pelham in 1749 succeeded in
carrying a conversion scheme, which may be regarded as
the forerunner of the modern arrangements of the kind.
Interest on part of the debt was reduced to 3! per cent,
for seven years, and 3 per cent, afterwards. Next year
that on the remainder was reduced to 3! per cent, for
five years, and 3 per cent, afterwards. The fundholders at
first dissented, but the high price of stock made it their
advantage to accept the conditions. The consolidated
3 per cent, stock was established in 1751 and existed till
the conversion of 1888 as the principal part of the debt.
Its price in 1752 was io6|, the highest point it ever
reached. The sluggish condition of trade, and the difficulty
of finding good investments sufficiently explain this high
estimation of the funds.

Up to 1 756 the debt had been reduced about 6,000,000,
and stood at 72,200,000 when the Seven Years' War com-
menced. Expenditure at once rose so much as to lead
to borrowing, which continued until, at the close of the
war in 1763, the funded debt was 122,600,000 with a
floating debt of about 14,000,000. The consequences of
the war were apparent in the position of the Exchequer
for some years afterwards. In 1766 the funded debt had
risen to 129,500,000 with a further unfunded one of over
10,000,000. The succeeding years of peace allowed of
small reductions, coming in all to about 10,000,000 in
1775, when the funded debt was 125,000,000 and the



CHAP. III.] THE HISTORY OF THE ENGLISH DEBT. 555

floating one 4,150,000, or a total of almost 130,000,000.
As might be expected, the American War of Independence
added seriously to this burden. At the conclusion of
the Peace of Versailles (1783) the total debt was over
238.000,000, or an annual increase of about 13,500,000.
During the latter part of the war the strain on English
credit was shown by the low price obtained for the loans
of that period.

Pitt's first administration dates from 1783, and its earlier
part, which may be called the peace one and which ended
with the outbreak of the war with France, did not accom-
plish much in the direction of diminishing the capital of
the debt. In 1786 the new Sinking Fund was established,
and by 1793 ^ nac ^ redeemed about 10,250,000, leaving
a net capital charge of 228,000,000.

The characteristics of the second half-century of the
debt history are found in the great growth of both capital
amount and interest charge. After taking into account
the small repayments in time of peace, there remains a net
addition of 180,000,000 in the fifty-four years 1739-1792,
while the annual payment for interest had risen from
2,000,000 to nearly 9,500,000 in the same period.

The terms of borrowing varied, but up to 1780 the
loans
were usually issued at par : their capital therefore
represented the amount really received, though they were
accompanied by small annuities for terms of years or
other special favours. Lotteries were also combined
with the loans
, subscribers to an issue of stock receiving
tickets. In 1781, however, a loan of 12,000,000 was
raised at the rate of 150 of 3 per cent, and 25 of 4 per
cent, stock for 100 paid, or a total capital of 21,000,000.
The result of adopting this system was to add nearly
25,000,000 to the nominal capital of the debt without
any corresponding receipt. It was probably due to the
fear entertained by subscribers that their stock would on
the return of better times undergo a reduction of interest,
and also, to the preference of the government for a large 3 per



556 PUBLIC FINANCE. [BooK V.

cent, stock. As mentioned above, the sinking-fund policy
which so powerfully affected the course of the debt was
started at this time, though its influence was not as yet
very noticeable.

4. The protracted struggle with France, first under
the Revolutionary government and afterwards under
Napoleon I, is by far the most important and critical
period in the development of the debt. Without the ab-
normal expenditure of the twenty- three years 1793-1815,
the sinking fund of 1786 would have automatically wiped
out the comparatively small capital liability ; and the
rapid growth of British industry, free as it would have
been from the oppressive taxation that Pitt was compelled
to impose, would have made the operation practically
unfelt. The whole financial system of Great Britain has
been profoundly affected, but the present debt is the most
prominent of these results.

From the outbreak of war (1793) to the peace of Amiens
(1802) loans
were required in every financial year. The
amounts, at first small, rose with the great outlay that the
continuance of hostilities made necessary, till in 1797 the
capital funded was over 67,000,000, the actual sum ob-
tained for this acknowledgment of debt being ^"44,000,000.
As nearly 7,000,000 were redeemed by the sinking fund
in that year, the net increase of debt was somewhat over
60,000,000. In the other years the additional debt con-
tracted was not nearly so large 1 , but the effect of the
methods pursued was shown in the debt at the conclusion
of peace. It was just 500,000,000, an increase of over
270,000.000 since the opening of war in 1793, l - e -
27,000,000 per annum. The sinking fund had paid off
besides 57,000,000 of the debt incurred, which must be
added to the other liabilities of the time. The principal
cause of this great addition was the unwillingness to impose
taxes at the commencement of the war. For the four years
1793-7 the total amount raised in taxation was 70,000,000,
or 17,500,000 on the yearly average, while for the four
years 1799-1802 it was 134,750,000, or an increase of
92! per cent.

The short peace did not allow of any reductions in ex-
pense, and on the recommencement of war the borrowing
system was again applied, though not to so large an
extent. At the opening of the year 1816 the funded debt
was 816,000,000, with a floating one of 60,000,000, show-
ing a total increase of 360.000,000, or over 25,000,000
per annum. This comparatively satisfactory result, not-
withstanding the immense expenditure of the Peninsular
War, is explicable by reference to the much heavier taxa-
tion imposed. The income tax was in full operation, and
the tax revenue rose from 37,250,000 in 1803 to
75.500,000 in 1815. Mr. Gladstone has asserted that the J/
early adoption of the income-tax would have saved the
necessity of borrowing, since the annual expenditure apart
from the debt charge would in the later years have been
met by the receipts from taxation l . Whether this would
have been possible may be a matter of dispute, but there
can be no question that the system of loans
was carried to
excess.

The facts just noticed bring out strongly the defects in
the method of Finance during this trying period. They
are to be found : (i) in the dislike to impose sufficient taxa-
tion, a feeling very natural on political grounds, but |
indefensible from the purely financial point of view. The

1 Financial Statements, 16.



558 PUBLIC FINANCE. [BOOK V.

instances of this error occur chiefly in the earlier years.
(2) In an undue reliance on the purely illusory expedient
of a sinking fund, which, taking the most favourable view,
increased the expense of management and deranged the
loan
market. (3) In the system of borrowing at a higher
nominal capital than the amount actually received, thereby
preventing, or at least hindering, future conversions of
debt.

5. The French wars brought the English debt to its
maximum point. Since that date there has been some,
though insufficient, reduction of it. The whole course of
treatment has been towards a sounder and more careful
policy, guided in a great degree by the influence of theory.
The criticisms of Hamilton and Ricardo 1 exposed com-
pletely the sinking-fund fallacy. After inquiry it was
settled, in 18(9, that a real surplus of 5,000,000 annually
should be preserved ; but after various difficulties and
changes, the sinking fund^ as a positive institution was
abolished in 1829, whatever actual surplus existed at the
end of each financial year being marked off for redemption
of debt. The continuance of peace enabled the method of
conversion to be tried with effect, though the field of
operations was limited by the mistaken policy of borrowing
in a 3 per cent, stock with a high nominal capital. In 1822
152,000,000 of 5 per cent, stock was converted into 4
per cents., and in 1830 further reduced to 3^ per cents.
The old 4 per cent, stock (76,250,000) was reduced to
3^ per cent, to which rate a small balance of 4 per cents,
(about 10,000,000) was also reduced in 1834.

The period 1830-40 is one of the most discreditable in
English Finance. Hardly any fiscal reforms were carried
out, and the debt was increased by budget deficits. Its
amount in 1841 was 792,000,000, nearly 8,000,000 more
than in 1830. The firmer administration of Peel restored
the Finances. A surplus was procured by the revived

1 Hamilton's Inquiry was published in 1813, and Ricardo's Essay on the
Funding System in 1820.



CHAP. III.] THE HISTORY OF THE ENGLISH DEBT. 559

income-tax, and a fall in the rate of interest made it
possible in 1844 to convert the 34 per cent, stock
248,000,000 into 35 per cent, for ten years and 3 per
cent, afterwards. The further effort to create a z\
per cent, stock, made by Mr. Gladstone in 1853, proved
a failure, owing to the rise in interest and the pressure
of the Crimean War. This latter event supplied another
illustration of the operation of war on indebtedness ;
though the progress of wiser views on the treatment
of extraordinary expenditure was evidenced by the in-
creased taxation which contributed the larger part of the
total war expenditure (70,000,000). Since that time
no noticeable addition has been made to the debt, while
the growth of wealth has made the weight of the existing
charges very much lighter. Moreover, though no heroic
efforts for the payment of debt have been tried, the agen-
cies of the reformed sinking fund, the terminable annuities,
and conversion have, taken together, produced a decided
effect on both the capital and interest charges. The
recent history of the debt is in fact altogether concerned
with them.

6. When the sinking-fund theory was abandoned,
there still remained the old rule by which the surplus
remaining in the Exchequer at the end of each financial
year passed to the Commissioners for the Redemption of
the debt. If large surpluses were realized year after year,
this would be a satisfactory method, but with accurate
balancing of receipts and expenses it is of little service.
A considerable excess of receipts over expenditure gives
rise to a cry for remission of taxation that is not easily
withstood. Hence the need of marking off some special
funds for the payment of debt. Sir S. Northcote's sinking-
fund measure (1875), by which an amount of 28,000,000
annually was permanently set apart for this end, is the
most obvious course. Unfortunately it is very easy to
find plausible reasons for cutting down the sum so
fixed. Under Mr. Goschen the 28,000,000 became, first



560 PUBLIC FINANCE. [BOOK V.

26,000,000, and now only 25,000,000, a sum which leaves
a very small margin over the interest and terminable
annuity payments.

The method of redeeming debt by the use of terminable
annuities seems on the whole more effective. In their
commencement public debts were often raised by annuities
in various forms *, and during the Revolutionary and Napo-
leonic wars the system of adding long annuities to the
funded loan was adopted, with the arrangement that they
should all terminate in 1 860. By this system a consider-
able relief was gained when the date of expiry was reached.
As an effective method of redemption fresh terminable
annuities have been created, and an equivalent amount
of stock cancelled. The largest creations were in 1868-
and 1884. In the former year 24,000,000 of savings-
bank stock was cancelled, and an annuity of 1,760,000
substituted. In 1884 Chancery stock to the amount of
40,000,000 and over 30,000,000 of Post Office savings
bank stock were similarly treated, with the result that the
funded debt has been brought within more moderate limits.
In 1 860-1 its total amount was 788,970,799. After
thirty years it stood in 1890-1 at 579,472,082, or almost
210,000,000 less. On the other hand the terminable
annuities had risen in capital value from 16,500,000 to
68,500,000, an increase of 52,000,000. Within the last
ten years the agency of conversion has also been employed,
and with success. Mr. Childers' conversion scheme of 1884,
by which 2-| or af- per cent, stock might, at the option of
the holder, be obtained for the existing 3 per cents., with
an increased capital of 2 or 8 per cent., according to the
stock chosen, failed to attract. Only 21,648,000 of stock
was offered for conversion (more than half of it from public
offices).

The failure of this attempt prepared the way for
Mr. Goschen's success in 1888. The principles adopted
were : (i) the creation of a single new stock, so that holders

1 See i, and ch. 6. 2 of present book.



CHAP. III.] THE HISTORY OF THE ENGLISH DEBT. 561

were not confused by a choice, (2) the avoidance of any
addition to capital, (3) the use of the most effective tech-
nical methods, such as conversion without expressed con-
sent where this course was legal, commission to agents for
the trouble imposed on them, and small concessions in
the quarterly payment of interest. These contrivances,
together with the persistent low rate of interest, enabled
the whole mass of stock to be converted or paid off. A
new stock, bearing interest at 2f till 1903, and at 2i from
that date for twenty years, has taken the place of the older
3 per cents., and a relief in interest to the amount of
1,400,000 annually has been secured, with the certainty of
an equal gain in 1903. As an incident of the process the
floating debt has become larger, and amounted in 1891 to
.-36,000,000, or more than double the normal level. As
soon as the condition of the money market permits, the
greater part of this sum will probably be funded or turned
into a terminable annuity.

7. Looking back on the course of the English debt, it
is very plain that its growth has been altogether due to
war expenditure, while its continued existence must be
largely attributed to financial weakness. A comparison of
the debt incurred during each war with the amount paid
off in each succeeding peace establishes this. Over
600,000,000 was added in the great war (1793-1815);
hardly 75,000,000 was paid off in the forty years' peace.
The Crimean War added 40,000,000 ; it took twelve years.
of peace to pay off this sum. Greater vigour in the use
of terminable annuities, the maintenance of larger sur-
pluses, and above all a wider employment of direct tax-
ation in the form of an income tax would have produced
much better results. The pressure of the debt, however
calculated, is too light to justify such remissness. When we
remember that each million of debt redeemed means the
power of permanently remitting so much taxation, we can
better understand the advantage of a vigorous policy in
regard to it.