First, that after the present war, should we be so happy as to escape the ruin with which it threatens us, our taxes and expences will be so much increased, and at the same time our resources so much diminished, as necessarily to leave the credit and value of our public securities lower than ever.
Secondly. Though our credit and resources should continue undiminished, yet the great addition which the present war will make to the public debt, is alone likely to sink their value, because every increase of a saleable commodity has always a tendency to lower its price.—It follows from hence, that the purchasers of FOUR per cent. capitals have now a prospect of an advantage of 12 or 14 per cent. at redemption, which they could not have had before the last peace.
In connexion with this it must be considered, that it is now highly probable, that it will never be again practicable to reduce the interest of any 4 per cent. capitals. In order to such a reduction, government must be able to offer to the proprietors of these capitals their principal, should they not chuse to take lower interest, and consequently to borrow at an interest of 3½ or 3¾ per cent. But no sums will be lent on such lower interest, unless it can be depended Upon that capitals bearing that interest, when brought to market, will bear a premium of 1 or 2 per cent.; and this, when the three per cents. are not higher than 87 or 88, would require the excess of value of such capitals to be estimated at 14 or 15 per cent. whereas it has been lately found, that even FOUR per cent. capitals irredeemable for ten years, will not bear such an excess of value.—A reduction, therefore, of the interest of FOUR per cent. capitals, or a redemption of them by borrowed money, cannot now be reckoned upon; and the only cause that can REASONABLY sink their value compared with the THREE per cents. below the ratio of the rates of interest, is the probability of a redemption of them by the surplus of the national revenue. I need not say how little is to be expected from hence. Supposing, however, that much may be expected, I have shewn what effect it ought to have; and from the observations I have made, and particularly the computation in ([page 194]), &c. it appears, I think, that the price of the capital of five millions four per cent. annuities lately created ought to have been near 18 per cent. more than the price of the THREE per cents. This appears to be true on the supposition that this capital will be redeemed in fifteen years; (that is, in five years after the expiration of the term for which it is made irredeemable) that the 3 per cents. will rise to as high a price as they bore during the last peace; and that purchasers are allowed to make FOUR per cent. compound interest of their money.—Were we to suppose this capital discharged even in two years after it becomes redeemable, the value, made out in the same way, would be nearly 17l.
He who will consider all this, and also recollect the general price of the 4 per cents. before their reduction in 1749, (see [page 190]) must be convinced that the Treasury, at the time the last loan was settled, had good reason for taking the price of the new four per cent. capitals 17 per cent. higher than the price of the three per cents.—It has, however, been found that this was too high a valuation. Instead of being sold at 17l. more for every 100l. stock than the 3 per cents. they have been sold at only 13l. or 14l. more; and this has been the chief reason of the discount to which the last subscription fell.—It is hard to say, by what principles the money’d men who traffic in the funds have governed themselves in this instance; but certain it is, that they have not been guided by any of the rules of just calculation: And the same must be said of the value at which they have reckoned the short annuity of a half per cent. for ten years annexed to the new 4 per cents. In forming the scheme for the last loan this annuity was, I have said, estimated at 8⅟₁₀ years purchase, agreeably to its real value, supposing the payments yearly, the first payment to be made at the distance of a year, and money improved at 4 per cent. compound interest. But it has in general been sold at about 7½ years purchase; which is less than its value, supposing money improved at 5½ per cent. compound interest.[145]
From this account it appears, that could the caprice of the public have been foreseen, the price of the new four per cents. should not have been reckoned at more than 91l.; (the 3 per cents. being at 78l.) and that, consequently, to make up a value which would have produced 102l. for every 100l. advanced, either the term of irredeemableness and of the short annuity should have been lengthened; or, supposing this term the same, the short annuity should have been more than doubled. An artificial capital, indeed, of near half a million would in this case have been created. But this disadvantage might have been avoided, without bringing any additional expence on the public, by such alterations as I have before proposed; and by increasing in the corrected schemes, ([page 186]), &c. either the term of irredeemableness, or the short annuity, or the rate of interest, or all of them together.
The preceding account will, I fancy, help to shew what is practicable, taking things as they are, in borrowing money for public uses. It proves, that the nation loses greatly by the low price of all capitals bearing a higher interest than 3 per cent. and that could their value be raised, it would be greatly benefited.—For example. Could the new FOUR per cents. have been taken at 99l. for every 100l. stock, instead of 95l. the whole expence of the short annuity in the scheme of the last loan, and of a quarter per cent. perpetual interest, in the corrected schemes, ([page 186]), &c. might have been saved. But had the value of the 4 per cents. been raised in proportion to the rate of interest, or nearly in that proportion, a farther saving might have been made, in all the schemes, of the profits of the lottery, and, consequently, of 6000l. per annum in the annual charge.—My next enquiry, therefore, shall be, in what manner and by what regulations this may be done. I have written in the section on loans, on the supposition that such regulations are practicable; and I have proposed one of them; but I will here be more explicit.
It has been shewn, that before 1749 the cause which depressed the value of the 4 per cents. was the expectation of their being reduced; and that now this cause is the expectation of their being soon redeemed. Remove, therefore, these causes in any degree, and their value must rise in the same degree.—With respect to the first, it is in my opinion certain that it would be doing great service to the public to exclude it entirely. Our reductions of interest have proceeded from a policy too narrow; and the nation is likely to suffer by them much more than it has gained.[146] The savings they produce, being expended on current services, tempt to extravagance; give a fallacious appearance of opulence; and, by making our debts sit lighter, render us less anxious about redeeming them, and less apprehensive of danger from the increase of them. At the same time they render their redemption a work of more difficulty, and oblige government, when under a necessity of contracting new debts, either to give extravagant interest, or to offer extravagant premiums. That accumulation of artificial debts which I have pointed out has been owing principally to this cause; and had it not been, in particular, for the reduction in 1749, the public debts would now have been near 14 millions less; and a debt of above a hundred millions, instead of consisting of capitals bearing interest at 3 per cent. would have consisted of capitals bearing some of them 3½, some 4, and some 4½ and 5 per cent. interest, which (supposing them all at a medium to bear 4 per cent.) a million per ann. would have redeemed in six years less time, and at twenty-one millions less expence.—In short; reducing of interest is one of those unhappy TEMPORARY EXPEDIENTS to which statesmen are apt to betake themselves; and by which present relief is gained at the expence of future safety, and distress postponed by rendering it in the end more unavoidable and dreadful.—There cannot, therefore, be any sufficient reason against making the interest of the new capitals which may be created by any future loans, IRREDUCIBLE.[147] Should this raise the price of capitals bearing high interest in proportion to the increase of interest, government would be enabled to borrow to equal advantage whatever interest it offered; the new loans would not bring any greater annual charge on the nation than would have been necessary had the same sums been obtained by selling 3 per cent. capitals; and, at the same time, all the immense expence of douceurs and fictitious capitals would be saved, and all the advantages in redeeming the public debts obtained, arising from smaller capitals bearing higher interest.
Such a regulation as that now proposed would be alone sufficient for these purposes, when the amount of the debts bearing high interest and declared irreducible, is considerable, as appears from what is said in ([page 195]). But when a debt happens to bear a higher interest than any other, and is at the same time small, the probability of a quick redemption will operate in the same manner on its price with the expectation of a reduction; and in this case, therefore, it will become necessary, in order to avoid the inconveniences I have described, to POSTPONE REDEMPTION; and one of the best methods of doing this will be, by ordering, that such a debt shall be redeemed after some other given part of the funded public debts.—So slow has been our progress in redeeming debts, that this (supposing the part to be first redeemed considerable) would be reckoned, in the present circumstances of the funds, the same with making the debt to be last redeemed, irredeemable for ever. And should such an apprehension prove right, the public would lose nothing, because the debt whose redemption was postponed, would bring no greater annual charge on the public, than if the same sum had been obtained by selling a capital bearing any lower interest. But should it prove false, or should our debts be ever put into a fixed course of redemption, the public would gain greatly by being able, after discharging one part of its debts, to discharge the remainder more expeditiously and easily.
I shall beg leave to illustrate what has been now said by having recourse again to the last loan of FIVE MILLIONS.—During the last 60 years, or from the first establishment of the sinking fund to the year 1777, no more than about FIFTEEN MILLIONS of the public funded debts have been paid. An order, therefore, that the capital of five millions bearing 4 per cent. created by the last loan, should not be discharged unless a capital of twenty-five or thirty millions in the three per cents. shall have been first discharged, would have carried its redemption to so distant a period, as might probably have raised it to the same comparative value with any 3 per cent. capitals.