The surplus which is credited to the Old Sinking
Fund is sometimes confounded with the balance of
savings which is surrendered by the departments.
They are not the same things : there is in fact no
direct connection between them. The surplus for
the Old Sinking Fund is what we have seen. It is
the excess at the end of the financial year of
revenue receipts into the Exchequer Account over
issues therefrom chargable against revenue. It is
ascertained when the Exchequer Account for the
year is closed on March 3ist. The surpluses to be
surrendered by the departments are the savings on
their grants, which are the sums by which their
actual net expenditure on the grants falls short of
the grants themselves. They are not ascertained
until the Appropriation Accounts are made up
several months after the close of the financial year.
The surplus for the Old Sinking Fund is represented
by credit still in the Exchequer Account, and it
stays there as part of the Exchequer Balance until
it is issued by the Treasury to the National Debt
Commissioners ; surpluses to be surrendered by
the departments are represented partly by credit
still on the Exchequer Account and partly by credit
in the hands of the Paymaster General and of sub-
accountants. Departmental savings do indirectly
affect the surplus available for the Old Sinking
Fund, but not always the surplus for the year in
which they were made. They affect that surplus
only if the Treasury makes a short issue. If the
Treasury is sure (as it seldom is) that the net
expenditure of a department on a certain Vote will

be less than the amount granted for that Vote, it
leaves some of the amount so granted unissued
from the Exchequer Account at the close of the
financial year. That decreases the total issues for
the year chargeable against revenue, and thereby
increases the surplus, if any, for the Old Sinking
Fund. On the other hand if the whole amount of a
grant for a Vote is issued to a department, any
saving which it finds that it has made when it draws
up its Appropriation Account is repaid to the
Exchequer by being written off the grant for the
similar Vote in the year then current. The effect
of that is to decrease the issues from the Exchequer
chargeable against revenue, and thereby to increase
the surplus (if any) available for the Old Sinking
Fund, in the year following that to which the
saving belongs. It follows that the Treasury can
within limits manipulate the Old Sinking Fund.
Suppose that toward the end of the financial year
it sees that there is going to be a big surplus for
the Fund, and suppose that in part that surplus is
due to departments having been so economical
that it will be possible for the Treasury to leave
substantial amounts of their grants unissued as
" short issues " ; if it pleases the Treasury can issue
the total amounts granted, although it knows that
they will not be wanted. It will thus reduce the
surplus for the Old Sinking Fund in the expiring
year in relief of the revenue in the next. The
proceeding may be irregular and contrary to the
spirit of the law : it will not be contrary to its
letter.



320 NATIONAL FINANCE

THE NEW SINKING FUND

Obviously the amount available each year for
the Old Sinking Fund must be a very variable
quantity. For the ten years from 1895-6 to 1904-5
the Fund got nothing. For the three following
years it got 3*5 millions, 5*3 millions, and 2*6
millions respectively. Then there was nothing
again for two years; and for 1910-11 it got 2-4
millions; for 1911-12, 5,000,000; for 1912-13, only
180,000; and for 1913-14, 750,000. It would not
do to have no other source for the supply of funds
for reducing debt than this very uncertain one.
Financial virtue requires that the good work of
redemption should be carried on with regularity and
as quickly as possible; and for that purpose it would
be well that a sum of money should be provided
every year more certain in amount. At bottom the
object of making provision of the sort is to main-
tain the nation's credit amongst lenders. Nothing
is more encouraging to a lender than to see his
debtor paying off debt with reasonable rapidity
and with absolute regularity, according to a fixed
programme. It was not until 1875, when Sir
Stafford Northcote (Lord Iddlesleigh) was Chan-
cellor of the Exchequer, that the need for a fixed
annual provision for the reduction of debt in
general was recognised, to supplement the Old
Sinking Fund and to take the place of a number
of minor and special sinking funds. In that year it
was enacted that a sum should be provided
annually for the purpose, to be called the New
Sinking Fund. With varying fortunes, in varying
amounts, and not without interruption, its provision



SINKING FUNDS 321

has been maintained ever since. No fixed sum is
specifically set aside for the New Sinking Fund.
There is a traditional policy that sinking funds, to
protect them from predatory politicians, are to be
hidden. To hide the New Sinking Fund it is
lumped in with the total provision for the service
of the National Debt. By the Sinking Fund Act of
1875, the amount to meet the annual service of the
National Debt charged on the Consolidated Fund
was fixed at a sum to be increased in three years to
28,000,000. Out of that was to be paid in the
first place interest on the debt, funded and un-
funded, the amount due on Terminable Annuities
charged on the Consolidated Fund, and the
expenses of the management of the debt; and
the balance was to be used for the redemption ot
debt. It is this balance that is the New Sinking
Fund. Since then the total amount of the annual
charge for the Debt has been altered several times.
When governments have been hard up they have
reduced it, thus raiding the New Sinking Fund.
When times have been good it has been increased
again, thus restoring the Fund. In 1900, when new
debt was being created to pay for the Boer War, it
was reduced to 23,000,000, and the New Sinking
Fund disappeared until 1903, when the fixed charge
was restored to 27,000,000. After reaching a
maximum of 29,500,000 in 1908, it now stands at
24,500,000. At that figure the amount available
as New Sinking Fund for the reduction of debt is
about 4,500,000.

Like the Old Sinking Fund, the New Sinking
Fund may be applied to the purchase or redemption
of any Government stock the service of which is

Y



322 NATIONAL FINANCE

charged directly on the Consolidated Fund. That
includes Consols and Terminable Annuities,
Exchequer Bonds, and under the Treasury Bills
Act of 1877, renewable Treasury Bills of Supply.
Unlike the Old Sinking Fund, it may not be applied
to the repayment of Deficiency Advances. No
more than the Old Sinking Fund may it be applied
to the repayment of Ways and Means Advances or
Ways and Means Treasury Bills. It is to be issued
" from time to time " by the Treasury to the
National Debt Commissioners and applied within
six months of its issue. Since the amount of the
Fund is a balance, equal to the difference between
the fixed annual charge of the debt and the amount
required for the service of the debt, its precise
amount cannot be ascertained until the end of the
financial year, when the Treasury knows exactly
how much the service of the debt has required.
But the approximate amount to be required for the
service of debt at its fixed rate of interest can
easily be foretold, so that before the end of the
financial year the Treasury can foretell also about
how much will be available for the New Sinking
Fund. It can therefore, and usually does, make
one or more issues of credit on account of the
Fund to the National Debt Commissioners out of
the Exchequer Account before the end of the
financial year and during its last quarter. It waits
until then to make them, because it is then that the
revenue receipts are largest and the balance of the
Exchequer Account biggest.

We have now dealt with the differences between
the Old and the New Sinking Funds. Next we will



SINKING FUNDS 323

deal with what is common to both, and that is the
way in which they are applied. In each case credit
is issued from time to time on account of the Sink-
ing Funds by the Treasury to the National Debt
Commissioners. It has to be applied within six
months of its issue ; and the Treasury arranges so
that the Commissioners shall be able to spread its
application evenly over the year. It is applied,
for the most part, by buying stock in the open
market on the Stock Exchange. To make their
purchases for them the Commissioners employ
a long-established firm of stockbrokers of high
standing, who are commonly known on the Stock
Exchange as the " Government brokers." Credit
is issued to the Commissioners by the Treasury
in large amounts. Needless to say it is not all
applied to the purchase of stock at once and in
a lump. Acting under the instructions of the
National Debt Commissioners and in the light of
their professional skill and knowledge of the Stock
markets, the Government brokers make their pur-
chases gradually and according to the state of the
market. Pursuing the obvious end of getting as
much stock for as little money as possible, they
buy more when the price is low and less when the
price is high, and always a little at a time, so as to
avoid raising the price of the stock against them-
selves by running the market short of supplies.
With an occasional big purchase or redemption of
Treasury Bills or of Exchequer Bonds the bulk of
the fund is devoted to the purchase of Consols
(Goschens). All the year round and about every
other day on an average the Government brokers
are seen in the Consol market, buying stock for



324 NATIONAL FINANCE

the Sinking Funds. Apparently they never buy
less than $ooo nominal of stock, or more than
50,000, and their usual purchase is of 25,000.
Of course the frequency and the amount of their
purchases depend on the amount which they have
to spend.

In these daily appearances of the Government
brokers on the Stock Exchange and in their daily
purchases there we see actually at work the pro-
cess of maintaining the credit of the nation by the
redemption of its debt. The object of maintaining
its credit is in order that, if it has to borrow again,
it may be able to do so easily and cheaply. Ease
and cheapness in borrowing depend on the market
valuation of the Government's outstanding stock;
the lower the price of Consols, the more expen-
sive is it for the Government to borrow. If the
market price of 100 nominal of Consols is 90,
the Government would get 90 or a little less for
a new promise to pay 2 los. a year ; if it is only
80, that is all that the promise would fetch. In
other words to maintain its credit as a borrower
the Government must maintain the price of Consols.
Now we have seen that the price of Consols de-
pends in the first place on the total supply of
capital for investment and the demand for it, and
those are things too big to be affected by the
measures even of the British Government. But
they depend also to some extent on the supply of
Consols, and on the demand for them amongst
investors. The bigger the demand and the less
the supply, the higher the price. So although the
Government cannot absolutely control the price
of Consols, which depends mainly on the state of




SINKING FUNDS 325

affairs in the world's capital-markets, it can do
something to help to maintain that price by
reducing the supply and increasing the demand.
That is what it does by setting aside money for
the Sinking Funds and by keeping the Govern-
ment brokers busy buying the stock in the open
market. Their purchases have a very decided
effect in checking a fall in Consols when they are
falling, and in hastening a rise when they are
rising. It is sometimes said now that the Govern-
ment brokers are the Consols market's only friend.
There is much less demand for the stock amongst
investors than there used to be. They go further
afield in search of higher rates of interest, and often
fare the worse. With so little demand as there is
nowadays for Consols amongst ordinary investors,
the regular buying for the Sinking Funds is of
great value in keeping their price, in Stock Ex-
change language, firm. When Sinking Funds are
raided and the buying is decreased or stopped, the
price of Consols promptly falls. That is the out-
ward and visible sign of the truth of the proposi-
tion that a nation's credit is improved by reducing
its debt, and the best and clearest evidence of the
value of the Sinking Funds.

Since a mistake is often made about the matter,
it is worth while specially to mention that neither
Old nor New Sinking Fund can be applied to the
buying of Local Loans or of Guaranteed Irish
Land Stock. Only those stocks can be bought
with these funds which are directly charged upon
the Consolidated Fund, and Local Loans and Land
Stock are charged upon it indirectly and contin-
gently only. Each of those stocks has its own



326 NATIONAL FINANCE

arrangements for redemption. Instalments of the
principal of Local Loans are repaid by the local
authorities to the Local Loans Fund. They are
used, not indeed for the redemption of Local Loans
Stock, but to keep down the issues of fresh stock
required, by providing funds for fresh loans to
local authorities. Similarly instalments of the
principal of the purchase price of Irish Land are
repaid by tenants to the Irish Land Purchase Fund
as part of their annuities, and serve at present to
keep down the amount of fresh Land Stock which
has to be issued. In both cases it is obviously
sound policy that the instalments of capital should
be used rather as a means of reducing the amount
of fresh issues of stock than to buy stock in the
market ; it would be foolish waste of money to pay
commission to brokers for buying stock and selling
stock at the same time, when the money can simply
be taken and used without any stock operations
at all.

When the National Debt Commissioners have
bought stock with money from the Sinking Funds,
they cancel it by an entry in the registers kept at
the Bank of England, and that is the last stage in
the process of reducing the National Debt. A
little help in the work of reduction is had from
one or two other sources. In imposing certain
taxes, particularly the Land Tax and certain Stamp
Duties, Parliament has allowed those liable for the
taxes to compound for their periodic payment by
a single payment. A payment of the sort is a
capital payment made once and for all instead ol
a payment made annually or at other intervals.



T ,



SINKING FUNDS 327



It ought therefore not to be spent as revenue. It
ought to be invested, and it is. In giving leave
to compound payments of the sort, Parliament
expressly provides that the money received for
composition is to be invested in the best invest-
ment for the Government, which is its own stock.
The money is paid over to the National Debt Com-
missioners, who buy Government stock therewith
and cancel it.

There is a principle which underlies the scientific
use of Sinking Funds obvious enough when it is set
down in black and white, which yet took the official
financiers of this country a long time clearly to
understand, and which those of some other countries
seem not to understand yet. We have already
referred to it more than once. It is the principle
that it is no use to reduce debt with one hand if at
the same time you are increasing it with the other.
From the point of view of the stock market the
principle may be expressed thus : that it is no use
to increase the demand for Government stock if at
the same time you increase the supply. Whatever
good effect the increased demand would have had on
the price is negatived by the ill effect of the increased
supply. Suppose that a Government has set aside
out of revenue 5,000,000 a year for its Sinking
Fund for the reduction of debt ; and suppose that
a year comes when to make revenue balance ex-
penditure it needs 5,000,000. It may if it pleases
still pay the 5,000,000 into the Sinking Fund and
redeem debt with it, and borrow a fresh 5,000,000
to make both ends meet. Sometimes in the past
that has been done, or at least something practically



328 NATIONAL FINANCE

equivalent to that. It has been argued that it would
have a bad effect on the price of Government stock
to stop the purchases for the Sinking Fund. So it
would; but the effect of creating 5,000,000 of fresh
debt is just as bad, in quantity and quality. Under
the sorry circumstances the only sensible thing to
do is to raid the Sinking Fund, to use the 5,000,000
to meet expenditure, and to leave the debt un-
reduced on the one hand and unincreased on the
other. That is the more economical course, be-
cause it saves the expenses both of paying off and
of creating 5,000,000 of debt. It has another
positive advantage; it keeps the nation's accounts
free of artificial cross entries, and prevents the
unwary from deluding themselves into the belief
that the nation has made a true reduction of
5,000,000 in its total debt. It makes no difference
whatever that there is some distinction in the class
of debt redeemed and created; that the one is
temporary, for instance, and the other permanent.
On the nation's credit the result is in the long run
the same.

To raid the Sinking Fund is the best thing to
do under the circumstances; but that does not
make the circumstances any the less evil. Once
a fixed annual sum has been set aside for a Sinking
Fund, every conceivable effort, for reasons already
given, should be made to maintain the provision.
It should be looked upon as an absolutely binding
obligation. Only if, under compulsion of extreme
necessity, the nation has been forced to overspend its
income, it is better for it to draw upon the Sinking
Funds to make both ends meet, before it borrows
afresh. For the nation to maintain the operation



SINKING FUNDS 329

of a Sinking Fund at a time when it is creating
fresh debt is always wasteful, and always tends to
conceal the true state of its finances. A state
should by all means strive to make its revenue
balance its expenditure, with something over for
the reduction of its debt. If it fails to do so, it is
starting on a race with the constable ; but to try to
conceal the constable's pursuit by an ostentatious
reduction of debt which is negatived by a simul-
taneous increase is but to give wings to the pur-
suer's feet.

It used to be thought good policy as far as
possible to tie up sinking funds and tuck them
away in corners to protect them against depreda-
tions. No concealment, however, was found to be
of any use against a Chancellor in a bad scrape for
money. As the principle, moreover, became more
clearly understood, that it is no use to pay off
debt with one hand whilst you are creating it with
the other, it became clear also that there was a
positive disadvantage in having sinking funds too
carefully tied up and hidden. It meant that in a
bad year, when fresh debt had to be created, the
sinking funds could not be readily untied and used
to help the revenue and to reduce the amount of
fresh debt to be created, as they ought to be. For
that reason, men found, it was better to have the
whole provision for the reduction of debt con-
centrated in the Old and New Sinking Funds. It
is there in the public eye and has the only pro-
tection that in the long run is much help to a
sinking fund, and that is public opinion ; and when
fresh debt has to be created, it can be emptied back
into revenue to keep down the amount of fresh



330 NATIONAL FINANCE

debt without disturbing other regions of the
financial organisation.

ANNUITIES FOR THE REDUCTION OF DEBT

But we have still with us one survival from the
days of special Sinking Funds. There used to be
a very favourite way of tying up a sinking fund
and tucking it away. It was invented by Glad-
stone in 1863. When it was found that there
was a large block of Government stock in the
hands of a public department as an investment for
public funds, the Government took the stock,
cancelled it, and gave the department a terminable
annuity instead. It paid the department interest
equivalent to the interest on the stock, and paid to
it every year in addition an instalment in respect
of capital. The department, as it received the
instalments in respect of capital, invested them in
fresh stock. When the instalments of capital had
all been paid by the Government to the department,
the terminable annuity had come to its termination.
The whole result of the transaction was that a
block of stock had been cancelled, that the depart-
ment had been repaid its capital value, had in-
vested it in fresh stock, and had received interest
in the meanwhile. So the effect of the terminable
annuity was to act as a little special sinking fund
for the reduction of debt by the amount of the
particular block of stock cancelled.

Arrangements of this sort were made through
the National Debt Commissioners, and the stock
in respect of which they were made was mostly
Government stock held as investments on account
of the Savings Banks. One such terminable



SINKING FUND 331

annuity is still being paid and will not terminate
until 1924-5. It was created in 1900 to cancel
15,000,000 of Consols held as an investment for
Savings Bank Funds. There is another still being
paid that will expire in 1924. It was created in
1900 to extinguish a debt of 13,000,000 due from
the Government to the Savings Bank Funds. This
debt was represented by no securities, but by a
mere entry in the books of the Treasury. It was
for that reason called a Book Debt, and the annuity
to extinguish it is called the Book Debt Annuity.
The Book Debt, charged upon the Consolidated
Fund, was brought into existence in 1893, in sub-
stitution for 13,000,000 of Unfunded Debt, which
was then cancelled. 1

Terminable Annuities for the reduction of debt
have fallen into disuse since the establishment of
the New Sinking Fund. Content with the pro-
vision made by the latter for the reduction of debt
in general, Parliament no longer exerts itself to
reduce this or that debt in particular. But in their
days these terminable annuities did good work in
the reduction of debt, and in helping the process of
converting Consols from a 3 per cent, to a 2j per
cent basis.

1 There is also a small Sinking Fund Annuity of 15, 500
terminating in 1934 which is the remains of a conversion operation
in 1884.