So the capital of the Fund is constantly being
turned over, but nearly as much comes in during
the year as goes out, and fresh issues of Local
Loans Stock are only needed because of the new
work requiring additional capital expenditure
which is constantly being given by Parliament to
the local authorities.

The National Debt Commissioners do not
themselves make the loans directly to the local
authorities or receive directly the payments of
interest and principal from them. To do that a
special body has been established, whose name is
the Public Works Loans Commission, and whose
local habitation is at the office of the National Debt
Commissioners in Old Jewry. Acting under statu-
tory authority it considers applications for loans
from local authorities and arranges to make loans
to them, receiving funds with which to make the
loans from the National Debt Commissioners.
Local authorities pay interest and annual instal-
ments in repayment of the principal of their loans
to the Public Works Loans Commissioners. As to
the great bulk of the loans the Public Works Loans
Commissioners' security for the loans to local
authorities is local rates ; as to a small part it is
some special property of the local authority such
as a dock, a harbour, or a pier. A bond is given
by the local authority to the Public Works Loans
Commissioners, which is the visible evidence of the
security pledged to them. The Public Works Loans
Commissioners in their turn pay over interest and
annual instalments in repayment of principal to
the National Debt Commissioners for the Local
Loans Fund. The amount which may be advanced
by the National Debt Commissioners to the Public



284 NATIONAL FINANCE

Works Loans Commissioners in any year, and
therefore also the amount which may be advanced
by the latter to local authorities, is controlled by
an annual Act of Parliament, the Public Works
Loans Act, which specifies the total amount which
the National Debt Commissioners may issue in the
year for the purpose of local loans.

Directly the security for Local Loans Stock is
the assets of the Local Loans Fund, of which the
chief is the capital debt to that fund of the Public
Works Loans Commissioners. To meet their
liability to repay that debt the Public Works Loans
Commissioners depend ultimately upon the rates
due to the local authorities to whom they have
made advances, and upon a little special property
also ; so that ultimately those are the true security
for Local Loans Stock. The Government's guar-
antee of interest would become operative only if
the rates, etc., should prove inadequate to maintain
the assets of the Fund. Since the Fund has turned
out to be self-supporting, the Exchequer has never
been called upon for a contribution. Technically
Parliament does not guarantee the capital of the
stock. But practically, if it is found that the
capital of any loan cannot be recovered and has to
be written off the assets of the Fund, Parliament
makes good the loss. It is enacted in the Annual
Local Loans Act that that part of the principal of
any of the loans which has turned out to be
irrecoverable is to be written off from the assets of
the Fund ; and in the next Civil Service Estimate a
special grant is made for the repayment to the
Fund out of the Exchequer of money enough to
make good the sum written off. Thus Parliament



CONSOLS AND FUNDED DEBT 285

does in fact protect the assets of the fund and the
security for the capital of Local Loans Stock from
its chief source of loss. But it does not guarantee
the holders of the stock from loss due to the
depreciation of the market value of their stock
caused by general circumstances such as the rise in
the rate of interest on all loans.

Such is the machinery by which Parliament
provides money for the capital expenditure on
public works of the lesser local authorities. It is
only for the lesser authorities that money is thus
provided. They alone need the help, because of
their inferior credit. Big local authorities such as
the great cities and counties do not need to have
their credit backed by a Government guarantee in
order to borrow money cheaply. London, Liver-
pool, or Birmingham can go into the open loan
market and borrow on their own credit almost as
cheaply as the British Government can. They do
so ; making public issues of their stock, or selling
their bonds privately to banks and other investors.
But those borrowings are made on their own
credit alone. The British Government has no sort
or kind of liability for them. If London failed to
pay the interest on its stock it would be no concern
of the taxpayers of the United Kingdom, but of the
ratepayers of London only. Such municipal and
local borrowings are no part of the structure of
national finance. A contingent liability for the
interest on Local Loans Stock is the only liability
which the Exchequer and the taxpayer have in
respect of local borrowings. They undertake it to
give a helping hand to small local authorities
which have expensive duties cast upon them by




286 NATIONAL FINANCE

the taxpayers' representatives in Parliament, and
are not rich enough to go and borrow publicly on
their own credit alone.

A new use has been found of late years for the
machinery of the Local Loans Fund. Provision
was made by the Colonial Loans Act of 1899 for
charging on that fund fixed loans to poor colonies
and protectorates, which are not rich enough to
borrow money cheaply on their own credit. In
their case the process of advance and repayment
is exactly the same as in the case of loans to local
authorities, save that it is the Treasury and not
the Public Works Loans Commissioners that makes
the advance, and that the security for the advance
is the revenues of the colony. Several of the
West Indian Islands, Seychelles, and Cyprus, have
had advances of the sort, and the latest was an
advance of 3,000,000 authorised in 1914 for the
British East African Protectorates.



IRISH LAND STOCK

Of the two chief contingent liabilities of the
Exchequer, the second in size is its liability in
respect of Irish Land Stock. Crowning the long
effort to buy out the Irish Landlords an Act was
passed in 1903, when the late Mr. Wyndham was
Chief Secretary for Ireland, to provide for the
wholesale purchase of the land of Ireland from the
landlords, and for its re-sale to the tenants. It was
arranged that money for the purchase should be
provided in the first place by the issue of a Govern-
ment stock to be called Guaranteed Irish Land
Stock. This carried interest at 2} per cent., and was



CONSOLS AND FUNDED DEBT 287

redeemable at the option of the Government in and
after 1933. There is some 55,000,000 of the stock
now outstanding. As the stock was issued the
money received for it from investors was paid to a
special fund, the Irish Land Purchase Fund, which
is analogous to the Local Loans Fund. Like that
other fund this fund is managed by the National
Debt Commissioners. As occasion requires they
draw money out of it and pay it over to the Irish
Land Commission. It is the Land Commission
that arranges for the purchase of Irish land from
the landlords and for its re-sale to the tenants.
With the money handed over to them by the
National Debt Commissioners they pay the pur-
chase price of the land to the landlords. That
purchase price has eventually to be repaid to them
by the tenants who buy the land. Tenants, of
course, are unable to find the money on the spot ;
they repay the price of their land to the Land
Commission in annual instalments, and pay interest
on it in the mean time. It is the land itself that is
the security of the Land Commission for interest
and principal. Interest and instalments of purchase
price are paid as an annuity by the tenants, calcu-
lated at a rate per cent, on the purchase price.
The Land Commission receives the annuity and
pays it over to the National Debt Commissioners
as interest on the advances which it receives from
the National Debt Commissioners out of the Irish
Land Purchase Fund, and in repayment of the
capital of those advances. Thus the fund is re-
freshed, and out of it the National Debt Commis-
sioners draw money with which to pay holders
of Irish Land Stock the interest thereon. The



288 NATIONAL FINANCE

instalments of capital repaid to the fund may be used
for the purchase of Land Stock, to be cancelled,
or they may be put by for a time by investment
in other securities ; or they may be used to make
fresh advances, in reduction of the amount of
fresh stock to be used. Hitherto there has been
ample use for them for the latter purpose, as in
the case of the Local Loans Fund. It will be seen
then that the machinery of the Land Purchase Fund
is much the same as that of the Local Loans Fund.
In the case of the latter the ultimate security for
the interest on the stock is the rates, etc., of the
borrowing authority ; in that of the former it is
the land in the possession of the purchasing tenant.
By the Wyndham Act it was provided that if
the income of the Land Purchase Fund, derived
from the annuities paid by tenants, should turn
out to be insufficient to provide for the payment
of interest on the Land Stock issued to investors,
the deficiency was to be made good out of a fund
called the Irish Guarantee Fund, which consists
of grants from the Exchequer in aid of Irish rates.
The effect of that was that any deficiency would
have to be made good by the Irish ratepayer,
because of course the less help he got from the
Guarantee Fund, the more rates he would have to
pay himself. It was not expected at the time that
there would be any such deficiency. But in fact
there was. The finances of the Wyndham Act
broke down badly and promptly. There were two
causes. In the first place, much more money was
needed for the purchase of land than had been
expected; about 185,000,000 will probably be re-
quired, whereas the original estimate was about



CONSOLS AND FUNDED DEBT 289

1 00,000,000. In the second place, it had been
expected that the Land Stock could be issued at
little less than par; in fact, the first issue had to
be made thirteen points below par, and the dis-
count steadily increased. The effect of that was
that the Irish Land Fund, in return for a given
amount of annual interest to be paid to investors,
got less money than expected, had less money in
consequence to pay over to landlords as the pur-
chase price of land, and received less interest from
the tenants. Thus whilst the payments out of the
Fund for interest to investors were as big as had
been expected, the receipts into the Fund as an-
nuities from tenants were less. A big annual
deficiency appeared and the Irish ratepayer was
called upon to make it good, to which he strongly
objected.

To put things straight an amending Act had
to be passed in 1909, when Mr. Birrell was Chief
Secretary for Ireland. In order to get rid of as
much of the deficiency as possible, it was provided
first of all that future issues of the guaranteed
Irish Land Stock should carry interest at 3 per
cent, if the Treasury thought fit. The Govern-
ment has an option to redeem this 3 per cent,
stock in and after 1939. As a matter of theory
2| per cent, stock may still be issued, but in fact
since the Birrell Act all issues have been of 3 per
cent, stock. Carrying interest at a higher rate,
the 3 per cent, stock fetches a better price, and
thus prevents in part at least the accumulation of
a capital deficiency. To provide for the bigger
interest which has to be paid on it to investors
the Act raised the rate of the annuities to be paid

u



290 NATIONAL FINANCE

by tenants from the 3 J per cent, at which it stood
under the Wyndham Act to 3^ per cent. Finally,
any deficiency which there may still be in the Fund
year by year is to be made good, as to a small part
only out of the Irish Guarantee Fund by the allo-
cation to that purpose of a little grant called the
Ireland Development Grant, and as to the balance
by a grant out of the Exchequer. Owing to the
big discount at which Irish Land Stock has to
be issued in the present state of the investment
market, in spite even of the changes made by the
Birrell Act, tenants' annuities have never been
enough to cover the whole of the charges required
for Irish Land Stock, and the Exchequer has had
annually to make good a substantial difference.
In this the history of the Fund compares ill with
that of the Local Loans Fund. To make good the
difference a grant is voted annually in the esti-
mates. It appears in the Vote for the Irish Land
Commission, as provision for making good defi-
ciency in respect of Irish Land Stock issued at a
discount. In 1913-14 it amounted to 160,000, no
small matter.

There is some 20,000,000 of the 3 per cent.
Irish Land Stock now outstanding, and the amount
is rapidly increasing as the business of land pur-
chase goes on. Issues of the stock are now seldom
made publicly. As money is required the Treasury
brings stock into existence by addressing a warrant
to the Bank of England directing it to enter it on
its registers. It then hands the stock over to the
National Debt Commissioners as an investment for
public funds which they have in their hands, such
as those of the Post Office Savings Banks. All



CONSOLS AND FUNDED DEBT 291

that the public hears of the matter is an announce-
ment in the London Gazette that the stock has been
created and issued to the Commissioners. It is to
be observed, also, that under the provisions of the
Birrell Act a pare of the purchase price for the land
may be paid to the landlords in stock instead of in
cash. That makes no difference in the arrange-
ments of the Land Purchase Fund.

It is thus the history of the Wyndham and
Birrell Acts that is responsible for our having in
our list of Government stocks two sorts of Irish
Land Stock, the 2| per cent, and the 3 per cent.
For each the liability of the Exchequer is the same.
Primarily the security for them is the Irish Land
Purchase Fund ; and the Exchequer's liability is
a contingent liability only, to make good interest
should the fund fail to do so, which it does.

One small elaboration is needed precisely to
define the extent of the liability of the Exchequer
in respect of Irish Land Stock. In the scheme of
land purchase the state undertakes to provide a
bonus to landlords on the purchase price of their
estates. That bonus is an addition to the price to
be paid for the lands by the tenants. It is a free
gift; no charge is thrown upon the tenants in
respect of it. Money enough to provide the bonus
is borrowed by the Government on Guaranteed
Land Stock, just as the money to provide the
purchase price to be repaid by the tenants is bor-
rowed ; but it is set to a separate account called
the Irish Land Purchase Aid Fund. Out of this
Fund the National Debt Commissioners and Land
Commissioners pay the bonus to the landlords.
But interest on the stock by means of which the



292 NATIONAL FINANCE

capital of the fund is raised and instalments in
respect of replacement of the capital thereof are pro-
vided wholly out of the Consolidated Fund ; there
is no contribution towards them from the tenants'
annuities. The amount required is voted annually
by Parliament in the Vote for the Irish Land Com-
mission, and now amounts to about 250,000.

Such and so great are the nation's liabilities.
Contingent liabilities, Local Loans and Irish Land
Stocks have occupied more of our space than their
amount would justify in comparison with the great
bulk of the debt, which is Consols; but that is
because they are popular investments, and their
incidents are complex. It is to be regretted that
there has been a tendency of late to undo some of
the good work done in the conversion and con-
solidation of debt by the multiplication of fancy
stocks of this sort with special securities. In
practice there is little profit in securing on some
special fund a stock which everybody will look
upon as a Government stock. To make a dis-
tinction between such stocks and Consols by
securing them on special funds and calling them
contingent liabilities has no effect whatever in
improving the nation's credit. If anything goes
wrong, the Exchequer is sure to have to step in
and shoulder the burden. We have an example of
that in the Birrell Act, passed to remedy the
breakdown of the finances of the Wyndham Act.
Public opinion disregards subtleties, and lumps
such contingent liabilities in with the direct
liabilities, considering them both equally as parts
of the National Debt. Separations and elaborations



CONSOLS AND FUNDED DEBT 293

of the sort serve no very useful purpose, and
they do a little harm. They prevent the taxpayer
from finding out at a glance how big the National
Debt is, and by how much it is being increased;
and what the busy taxpayer does not find out at a
glance, he does not find out at all. There would
have been much to be said for providing money
for local loans and Irish land purchase by the issue
of Consols. It would have made no practical
difference to our liabilities, and by simplifying our
capital account it would have enabled the public to
keep itself better informed as to its state. As a
general rule it must always be good policy to keep
the National Debt in as simple and homogeneous
a form as possible. If the securities which repre-
sent it are allowed to become split up and com-
plicated by varying incidents, that makes it harder
for the nation to know what it owes and how much
it is paying off.

When the Local Loans Fund was established
by Lord Goschen, the chief argument for that step
was that a distinction ought to be made between
dead-weight debt, and debt against which the State
holds assets as a set off in this case the liability of
the local authorities to repay the loans made to
them. It is no doubt useful that some distinction
should be made, and the establishment of a separate
fund serves to make it. But it is enough that the
fund should be there, as a record of the payment
of interest and capital instalments on account of
the particular section of debt. It is the account of
the fund which shows what assets the nation has
to set against its debts. There is no reason why
the stock by means of which the capital of the



294 NATIONAL FINANCE

fund is raised and refreshed should be a special
stock. It might just as well be Consols, and in
view of what has been said, it would be better so.

Local Loans and Irish Land Grants are pro-
ductive capital expenditure. We proceed to con-
sider another form of expenditure which is also
productive.