First. A general fall of near 2 per cent. which took place in the stocks soon after the loan was settled.
Secondly. A lower valuation of the new 4 per cent. stock and the short annuity which took place in the Alley.—This was the principal reason; and it will be proper particularly to explain it. In doing this, it will be necessary to look back a little to the history of the public funds.
In 1717 the public debts were reduced from an interest of 6 per cent. to 5 per cent. and in 1727, from 5 per cent. to 4 per cent. In 1737 a bill was brought into the House of Commons by Sir John Barnard, for a farther reduction from 4 to 3 per cent. At this time the 3 per cents. were above par; and even, during the three first years of the war which began in 1740, they continued so high that government was able to raise the necessary supplies by borrowing at 3 per cent.—In such circumstances, it was impossible the public creditors should avoid expecting a third reduction; and this expectation would necessarily link the value of the FOUR PER CENTS. by leading the public to consider them as no more than a THREE per cent. stock having a short annuity of ONE per cent. annexed. Accordingly; before the war the difference of price between the THREE and the FOUR per cent. stocks was about 10 or 11 per cent. After the commencement of the war, a reduction becoming more doubtful and more distant, this difference became greater, and generally kept between 14 and 17 per cent. At the approach of the Peace in 1748, it sunk to 11 per cent. and soon after the Peace, the 3 per cents. having risen considerably above par,[142] and an universal expectation of a speedy reduction taking place, it sunk to 6 per cent.—It is evident, therefore, that the price of the FOUR per cents. has been governed by the expectation of their reduction,[143] and that, had there been no such expectation, their price, compared with the 3 per cents. would have been much higher. It will appear presently to be most probable, that had it not been for this expectation, the prices of these stocks would not have differed much from the proportion of the rates of interest.
In taking this account, I have only compared the THREE per cents. with the South-Sea FOUR per cent. capitals before their reduction in 1749, at which time they amounted to above 27 millions, and were (as the consolidated three per cent. annuities are now) the grand staple stock of the kingdom. In 1746 and 1747, two new FOUR per cent. capitals were created redeemable at any time, and transferable at the Bank. The price of these new capitals kept for some time after their creation, considerably below the price of the old South-Sea four per cents. the reasons of which were, I suppose, the general reasons which make new funds bear a lower price than old ones; and, particularly, their having less traffic in them, and being small and detached parcels likely to be first selected for the operations of finance.
Were the cause now assigned, or the expectation of a reduction of interest, the only cause that governed the comparative prices of 3 per cent. and 4 per cent. capitals, the excess of one above the other would never be more than the supposed value of a short annuity of 1l. till reduction.—But there is another cause which may operate in this instance, and which ought not to be overlooked; I mean, the expectation of a greater payment at redemption. The effect of the former is to diminish, and of the latter to increase the value of FOUR per cent. capitals.—In order to understand this it must be remembered, that when the 3 per cents. are at any considerable discount, it becomes practicable to redeem them under par, while debts bearing 4 per cent. interest must be redeemed at par. This will make a difference in favour of the latter, which will be greater or less in proportion to the greater or less discount at which the three per cents. are sold, the greater or less quantity of stock bearing 4 per cent. interest, and the greater or less probability that the whole or a considerable part of it will be soon redeemed[144]—Let us suppose, for instance, that all the public debts bearing 4 per cent. interest, consist of a single capital of FIVE MILLIONS redeemable at any time; and that all the rest of the public debts are THREE per cent. capitals sold at a discount of 12 per cent. or at 88l. for every 100l. stock. In these circumstances, there would be a certainty that the small stock bearing 4 per cent. interest would be selected for redemption as soon as possible; and, as a stock carrying such high interest could not be expected, when the 3 per cents. are at 88, to be redeemed under par, its real value would on this account exceed that of the THREE per cents. more or less in proportion as its redemption was more or less distant. And its whole excess of value in these circumstances is to be computed in the following manner.—It would consist of a 3 per cent. capital, for every 100l. of which 100l. in money is to be received; and of an additional annuity of 1 per cent. till redemption. Its excess of value, therefore, if the whole capital was to be redeemed immediately, would be the same with the discount of the 3 per cents. or 12 per cent. If the capital was not to be redeemed till the end of 7 years, its excess of value would consist of 12 per cent. payable seven years hence, and the present worth of an annuity of 1 per cent. for the intermediate term of seven years. 12l. payable at the end of 7 years is worth in present money (allowing compound interest at 4 per cent.) 9l. 2s. 6d. An annuity of 1l. for seven years is worth (reckoning the same interest) 6l. The whole excess of value, therefore, will be 15l. 2s. 6d. for every 100l. stock. If the redemption of the capital is to be delayed 15 years, the excess of value computed in the same manner will be 17l. 15s. 6d.—if 20 years, 19l. 1s.—if 30 years, 21l.
If the 3 per cents. had been supposed at a greater discount, it is evident that these several values would have been likewise greater; and had the quantity of 4 per cent. stock been supposed double or triple, the effect would have been the same with a delay of redemption; and had it been supposed thirty or forty millions, the effect (in consequence of our slow progress in redeeming our debts) would not have fallen very short of an eternal delay of redemption.
Before 1749, the amount of the public debts carrying 4 per cent. interest was near 58 millions. The expectation, therefore, of the advantage now explained could not then have any effect; and the only cause which could have influenced, in any considerable degree, the comparative prices of these stocks must have been the first I have assigned, or the expectation of their reduction; that is, in other words, the expectation of a sudden redemption of them, as soon as the 3 per cents. got above par, by borrowing money at that interest. Had not this been foreseen, or had there been an act of parliament rendering it impracticable, there is no reason to doubt but the price of the FOUR per cents. compared with the THREE per cents. would have approached nearly to the proportion of the rates of interest, agreeably to what is said in ([page 191]).
The state of the public funds has been much changed since the two last wars; but it is an alteration that has increased the comparative value of 4 per cent. capitals.
I have already observed, that during the last war there was reason to expect, that, as soon as peace came, the THREE per cents. would rise above par. No one can now entertain any such expectation. On the contrary; it is most probable, that they will never again rise to that which has been their average price during the last peace from 1763 to 1775, and which, I think, may be stated at 87 or 88.—My reason for this assertion is,