CHAPTER IX

FLOATING DEBT

IN the business of government, as in any other
business, it is necessary at times to borrow money
to supplement the regular revenue. We shall deal
hereafter with the Government's big and per-
manent borrowings, but before we come to them
it will be convenient to clear our way by a con-
sideration of some of its smaller borrowings of a
temporary sort. Debts of a Government which are
permanent or need not to be repaid for a long term
of years are called fixed or funded debts ; its debts
which are repayable within a short period, a few
years or even a few months, are called floating or
unfunded debts. In general the purpose of the
creation of floating debt is to provide money to
meet the ordinary expenditure of the year, in
anticipation of revenue, or to meet temporarily
some special capital expenditure which, it is
thought, ought to be repaid as soon as possible
out of revenue, and not to be allowed to remain
as a permanent burden on posterity. There are
three sorts of floating or unfunded debt in our
system of finance, called Advances, Treasury Bills,
and Exchequer Bonds ; and there is one sort that
is half floating and half fixed, called Terminably
Annuities. We will consider each in turn.



242 NATIONAL FINANCE

In Parliament's financial scheme for the year
it grants to departments the money which they
need, gives authority to the Treasury to issue
from the Exchequer Account the money which it
has granted, and provides for taxation to replenish
the Exchequer Account with funds to meet the
issues authorised. If the revenue from taxation
would only consent to come in at the same rate as
issues have to be made, all would then be well, but
unfortunately it will not. Men of millions will not
die in time to replenish the Exchequer Account
with their death duties before the quarter days,
when big issues have to be made, or even at regular
intervals. Nor will brewers, distillers, or im-
porters of tobacco clear their stocks or pay [their
duties at times which the Treasury would find
convenient. They have an awkward habit of post-
poning payment of as much of the duties as they
can until the end of the year, in the hopes of a
reduction of the rate in the new budget; and
then, if they think the duty will be reduced, of
further postponing payment into the next year, or
if they think that it will not be reduced, still more
if they think that it will be increased, of clearing
their stocks and making big revenue payments in
a lump and a hurry. Most upsetting of all, the
victim of the income tax is in the habit of putting
off drawing his cheque for the tax collector until
the importunity of the ascending sequence of
yellow, pink, and blue demand-notes can no longer
be borne, and that is not until the last quarter of
the year. In the result the rate at which the
revenue is collected is not regular : the last quarter
of the year is far richer in collections than the






FLOATING DEBT 243



first three. But expenditure cannot be postponed
until the revenue actually comes to hand ; it has
to go on almost as quickly in the first three
quarters as in the last, with a maximum at the
end of each quarter. In order then to enable the
Treasury to make issues to meet expenditure in
the earlier parts of the year, it is necessary to
provide it with some means of anticipating the
revenue which it will not receive until the last
quarter.

DEFICIENCY AND WAYS AND MEANS ADVANCES

When an ordinary mortal finds himself with
heavy expenses to meet, and no money with which
to meet them, but with money enough coming in
later on, if he is foolish or quite without credit
he goes to a money-lender, and if he is wise, and
has some credit he goes to his bank. His bank
lends him as an overdraft the money which he
needs, on the understanding that it is to be repaid
out of his future receipts. Being wise, and having
excellent credit, the Treasury too goes to its bank.
When towards the beginning of the year and at
the quarter days it finds that it will have to make
issues out of the Exchequer faster than the revenue
is coming in, in those lean months for revenue, it
goes to the Bank of England and gets from it an
advance, which is really an overdraft.

All sorts of borrowing by the Treasury or any-
body else on behalf of the Government, and this
sort of borrowing in particular, need the authority
of Parliament. Authority to borrow temporarily
in anticipation of revenue is conferred upon the



244 NATIONAL FINANCE

Treasury in two different ways, one way if the
money to be borrowed is for Supply Services, and
another way if it is for Consolidated Fund Ser-
vices. Every quarter big issues amounting to
some 5,000,000 have to be made from the Ex-
chequer to pay the interest on the National Debt.
To provide for them out of the ordinary balance
in the Exchequer at the time would often run it
inconveniently low. So to tide over the difficult
period the Treasury has permanent authority
under the Exchequer and Audit Act ( 12) to borrow
from the Bank of England what it needs in order
to meet in comfort the big quarterly issues for the
service of the debt. Such issues are made in the
first days of a quarter. Before the end of the pre-
ceding quarter the Chancellor of the Exchequer
writes to the Governor of the Bank of England
and tells him that he will need advances in the
ensuing quarter " to meet the excess of the per-
manent charge beyond the income of the Consoli-
dated Fund in the current quarter," and requests
him to get the advances authorised. In due course
the Governor answers that he has acceded to the
Chancellor's request. When the amount needed
has been certified by the Treasury, the Bank
advances it, and it is placed to the credit of the
Exchequer Account. According to the Bank's
system of accounts, the advance appears in its
books as an advance made on Government Se-
curities. That is what it is, since the security for
the advance is the Government's statutory obli-
gation to repay it. In the weekly return, there-
fore, of the Bank's assets and liabilities the item
' ( Government Securities " is increased by




FLOATING DEBT 245

amount of the advance made. As the revenue
comes in, the advance is repaid with interest at the
rate fixed by the Exchequer and Audit Act, which
is half the Bank's official rate of discount current
on the day on which the money is received into the
Exchequer Account. The whole principal and
interest has to be repaid in the quarter following
that in which the request for the advance was made.
In the weekly return of the Exchequer Account
advances of the sort appear as " Temporary Ad-
vances, i Advances by the Bank of England on
account of the deficiency of the Consolidated
Fund." For that reason they are commonly known
as Deficiency Advances. The Treasury's power
to borrow thereon is limited only by the extent of
the expected excess of the charge on the Exchequer
Account for Consolidated Fund Services over the
expected receipts into the Account in the coming
quarter. The chief characteristics of the advances
are that they are to provide for Consolidated Fund
Services, and are made under the authority of the
Exchequer and Audit Act ; and that distinguishes
them from another way of borrowing in antici-
pation of revenue which we have now to consider.
Since the revenue will not come in when it is
wanted, there may be just as much difficulty in
meeting the payments for annual Supply Services
in the earlier parts of the year as there is in meet-
ing those for the permanent charges on the Con-
solidated Fund. In the one case as in the other
the Treasury must have power to fill up the gap.
Power to borrow to cover the deficiency in the
case of the permanent Consolidated Fund Services
is given by the permanent Exchequer and Audit



246 NATIONAL FINANCE

Act. For power to borrow to meet the annual
Supply Services the Treasury receives annual
authority in the Consolidated Fund and Appropria-
tion Acts. All such Acts, after authorising the
Treasury to issue out of the Exchequer for the
service of the year the lump sum granted by
Parliament as Ways and Means, continue as
follows :

"The Treasury may borrow from any person,
by the issue of Treasury Bills or otherwise, and
the Bank of England (and the Bank of Ireland)
may advance to the Treasury on the credit of the
said sum, any sum or sums not exceeding in the
whole [the amount which the Act authorises the
Treasury to issue]."

We leave the matter of Treasury Bills on one
side for the present ; it is the " otherwise " with
which we are first concerned. In practice, " other-
wise" consists of borrowing from the Bank of
England on overdraft, in the same way as that in
which Deficiency Advances are borrowed. If the
Chancellor of the Exchequer finds at any time that
the revenue is coming in so slowly in comparison
with the issues which he has to make for Supply
Services that it looks as if the balance on the
Exchequer Account would be run inconveniently
low, he writes to the Governor of the Bank of
England and asks him to have the goodness to
consent to an advance during the current quarter

of an amount not exceeding , and he mentions

the amount. He also mentions the rate of interest
which he proposes that the advance should bear
(it must not be more than 5 per cent), fixing it
with reference to the Bank's official rate of dis-




FLOATING DEBT 247

count. When the Bank has considered the matter,
the Governor answers and tells the Chancellor
that it has agreed to make the advance. So the
Advance is made and placed to the credit of the
Exchequer Account. According to the terms of
the Appropriation Act, principal and interest have
to be repaid out of the revenue received into the
account before the end of the quarter following
that in which the advance was made. Advances of
this sort, since they are borrowed on the credit of
funds voted by Parliament for Ways and Means, to
distinguish them from Deficiency Advances are
called Ways and Means Advances, and appear in
the weekly return of the Exchequer Account as
" Temporary Advances, Advances by the Bank of
England. On the credit of Ways and Means, by
Other Advances so much." In the ordinary course
of things they are seldom necessary save at the
end of a quarter, the time at which the depart-
ments are paying their bills, and, as we have seen,
big issues are being made from the Exchequer
Account for Supply Services to bring the accounts
of the Votes and the balances in the hands of the
Paymaster General into agreement with the grants
of Parliament. We usually find therefore Ways
and Means Advances, like Deficiency Advances,
appearing in the Exchequer Account shortly before
the end of the quarter, and the repayment of them
soon after it. Like Deficiency Advances, in the
books of the Bank Ways and Means Advances go
to swell the item of Government Securities.

The section of the Act quoted says that the
Treasury may borrow from " any person." In fact,
the only other person besides the Bank of England



248 NATIONAL FINANCE

who ever provides the Treasury with a Ways and
Means Advance is the National Debt Commission.
It does so seldom, but it does so sometimes. Money
for the advance is provided by the Commission out
of the various balances of public funds held by it
for investment, to be described in a future chapter.



TREASURY BILLS

Now we come to Treasury Bills. When a
house of business of any sort finds itself in a fix
for money, because for instance it has to meet
payments before the money out of which its pay-
ments are to be made has come into its hands, it
goes first in many cases to its bank for an over-
draft. But if its bank has lent it as much as it is
convenient for it to lend, or if the borrower thinks
that he can get the money which he needs cheaper
elsewhere, he may raise it by means of a bill of
exchange. In substance a bill of exchange is a
promise to repay a certain sum of money specified
in the bill to whoever may be the holder of it on
a certain future date. Having made out a promise
of the sort, the would-be borrower takes it to some
rich person, a banker it may be or a bill broker,
who makes a business of that sort of thing, and
sells it to him for what it will fetch. If the names
which appear on the bill, of the people who have
made themselves liable to pay it, are those of
substantial folk with good credit, the price which
the buyer will pay for the bill is the sum which
those people promise to pay at its maturity, less
interest at the current rate on the money paid for






FLOATING DEBT 249



the bill until the time at which the bill matures and
the money is repaid. A bill of the sort, with good
names upon it and maturing in a reasonably short
time such as six months, is the safest security in
the world and the most convenient, and for that
reason it is the cheapest way in the world of
raising money.

In its temporary borrowings, the Treasury has
now learned to imitate the procedure of the business
house, and to supplement its overdrafts by borrow-
ing on the security of bills. To the late Walter
Bagehot, the editor of the Economist, is due the
credit of pointing out to the Government the ad-
vantages of thus adapting to its needs the methods
of commerce. The credit of the British Govern-
ment, as he said, is the best in the world ; and the
best name in the world on the best security in
the world makes an ideally cheap and convenient
way in which to borrow money. If, he argued,
the Treasury wanted to borrow money for short
periods at the lowest possible rates, it should learn
from its mercantile rivals in the loan market ;
it should compete for loans with commercial
borrowers on an equal footing, making use of all
the refinements and economies which they have
invented to facilitate their borrowings, and in
particular of the bill. So the Treasury did. By
the Treasury Bills Act in 1877 (4 Viet. c. 2) the
Treasury was given power to issue bills for certain
purposes, with which we will deal hereafter. It
was not, however, until 1902 that the power to
borrow on Treasury Bills for Ways and Means
was included in the section of Appropriation Acts
and Consolidated Fund Acts quoted above. In



250 NATIONAL FINANCE

that year the exceptional expenditure on the South
African War greatly exceeded the revenue, and the
temporary borrowings which were required were
so large that it was inconvenient to the Bank of
England to supply out of its own resources alone
all the money needed as Ways and Means Advances.
So power to borrow on Treasury Bills also in an-
ticipation of the revenue was given to the Treasury
in order to enable it to draw upon a wider area of
supply for its loans. It is now always provided in
Annual Appropriation and Consolidated Fund
Acts, in addition to the general authority already
quoted, that the date of repayment of any Treasury
Bills issued thereunder shall be a date not later
than the end of the financial year in which the bills
are issued and that a section of the Treasury Bills
Act, 1877, which gives power to the Treasury
to renew bills as they mature, shall not apply
to these bills; that is, that they are not to be
renewable, but must always be paid off as soon as
they fall due. The limit of the amount for which
Ways and Means Bills can be issued in the year,
like that for Ways and Means Advances, is the
amount which the Act which authorises them gives
the Treasury power to issue from the Exchequer
Account. What the Treasury receives for them
is credited to the Exchequer Account, and appears
there as "Temporary Advances, on the credit of
Ways and Means. By Treasury Bills so much."
In an ordinary year in which no unexpected event
makes the expenditure mount high above the
ordinary revenue, the amount borrowed in the
course of the year on Treasury Bills of the sort
is small in comparison with that borrowed on



FLOATING DEBT 251

Treasury Bills of another sort, which we have now
to consider. It is usually not more than about
;5,ooo,ooo or so.

So far the temporary borrowings which we
have considered, Deficiency Advances, Ways and
Means Advances, and Ways and Means Treasury
Bills, are all made for the sole purpose of antici-
pating revenue which will come to hand later in
the year. They are repaid as soon as may be out
of the revenue as it is received, the Advances
usually within a few weeks of the time at which
they are made, and the Bills before the end of the
year. Being all repaid within the year, they make
no difference to the nation's total debt at the end
of the year as compared with that at the beginning.
But there is another sort of borrowing, made in
the temporary form of Treasury Bills, which yet
runs on from year to year, and so amounts
practically to a permanent part of the National
Debt.

It is found convenient to have a small part of
the nation's great debt represented permanently
by Treasury Bills. These Bills are in substance
almost as much a part of the fixed debt as Consols.
They are issued by the Treasury under the stand-
ing authority of various statutes, and the amount
for which the Treasury now has authority to issue
them is 14,500,000. It is the practice to issue
them as six months bills. The chief difference
between them and Ways and Means bills is that
under the Treasury Bills Act of 1877 which brought
Treasury Bills into existence the Treasury has
power to renew them on maturity, so that they
continue from year to year. They need not be



2$2 NATIONAL FINANCE

renewed as soon as they mature. Formerly re-
newal had to be made within the financial year in
which the bills fell due, or else the power to
renew them was lost and the bills lapsed. But
that rule was found to be inconvenient. Its effect
was that the Treasury had to have outstanding at
the end of the financial year in March all the bills
of the sort which it was authorised to issue. Now
that is the time at which the Treasury needs least
to have them outstanding, because it is the richest
time for the collection of revenue. With all the
bills outstanding then, the Exchequer balances
were often raised to an unnecessarily high level.
It is also the time at which the Treasury has in
general to pay the highest rate of interest on its
floating debt, because the collection of revenue
has then reduced the supply of spare capital avail-
able for short loans, and with a smaller supply
more has to be paid for what there is. Having to
renew all its renewable bills within the financial
year, the Treasury thus had to have its floating
debt at its maximum at the most expensive time,
and that at which it was least needed. To remedy
that, by the Finance Act of 1906 ( 10) the time
within which the bills may be renewed was ex-
tended for a quarter after the end of the financial
year, from March 3ist to June 3Oth. That enables
the Treasury to pay off a part of its renewable
bills and to have them dormant in February and
March, when the rapid collection of revenue is
swelling Exchequer Balances and the rate of in-
terest on short loans is high.