An Inquiry into the Principles of Political Oeconomy (Vol. 2 of 2) / Being an essay on the science of domestic policy in free nations. In which are particularly considered population, agriculture, trade, industry, money, coin, interest, circulation, banks, exchange, public credit, and taxes

by Sir James Steuart

As the war continued, interest rose, from the demand for money, when the supplies became deficient.

The year following, viz. 1744, this manifested itself, by the conditions offered by government, which were: That, of two millions to be borrowed at 3 per cent. as before, upon the whole sum, 1 500 000l. should be formed into perpetual annuities, and the remaining 500 000l. into a lottery, consisting of 50,000 tickets, to be sold at 10l. each. The original subscribers to this loan subscribed therefore 10l. for the ticket, and 30l. for the annuity, in all 40l.; for which they were to receive 3 per cent. But the premium consisted in this; that every subscriber for 10 tickets, that is, 400l. of the total fund, had an annuity for life given to him of 4l. 10s.

This made five thousand annuities on lives, of 4l. 10s. each, or 22 500l. a year to be added to the interest of 3 per cent. on the two millions, that is, to 60 000l. a year of perpetual annuities. So that the whole loan of two millions this year cost government 82 500l. of interest, or 4⅛ per cent.; 22 500l. of which was to extinguish with the lives of the subscribers.

Now, if we suppose these life-annuities worth 20 years purchase[^[26]], this was the same thing as if government had given a deduction of 90l. out of the 400l. subscribed; consequently the remainder, which was 310l. produced 12l. This makes the rate of interest upon the loan to have been 3.87 per cent. And as government inclined that the loan should be made in that way, the lenders were willing that it should be so; and the difference between 3.87 per cent. (the then rate of money) and 4⅛ interest, which was paid by government, was a sinking fund, as it were, for the gradual extinction of the capital of the lottery for 500,000l. during the lives of the annuitants.

In 1746, perpetual or indeterminate[indeterminate] annuities were constituted at 4 per cent. and the premium upon the ten lottery tickets was raised to 9l. life-annuity.

It would be unnecessary to trace the various methods of contriving the premiums given in the succeeding years of this war. The principle upon which they were regulated was always to proportion them to the rate of interest at the time; and the motive was, I suppose, that by this method of borrowing, a part at least of the debt would become extinguished with the lives of the subscribers. There might perhaps be another, to wit, that by swelling the capital, for value not received, there was an appearance of borrowing at a lower rate of interest than what in reality was the case. Thus in 1747, when 6 300 000l. were borrowed, instead of giving not quite 4½ per cent. for this sum, they gave 4 per cent. upon 6 930 000l. which capital, although money should return to 3 per cent. was still to stand at its full value; whereas, had 6 300 000l. been borrowed at 4½ per cent. there would have been a saving of 600 000l. upon the capital; and at the peace, the interest of 4½ per cent. would equally have come down to 3 per cent. with the other funds.

[26]. This may seem a high valuation, and is, in fact, far beyond what any of those annuities sold for: but as the interest of money cannot be estimated, for a constancy, at more than 3 per cent. and that probably the best lives were chosen, the value to government of such annuities may well be estimated at 20 years purchase. By De Moivre’s tables, annuities for the most favourable ages, interest being at 3 per cent. are valued at 19.87 years purchase; and his valuations are generally allowed not to be too high.

During this first war of George the Second, the land-tax was constantly at 4s. in the pound; and new branches of customs, excise, or other inland duties, were created in proportion to the swelling of the national debts, which, on the 31st of December 1748, amounted to 78 293 313l. sterling, bearing 3 005 325l. interest; and the sinking fund, or surplus of all permanent taxes then imposed, after paying the civil list, and the interest upon this capital, amounted to 1 060 948l. sterling. During this war, the debts were increased above what they were at the end of 1738, by 31 631 546l. sterling capital, and by 1 043 272l. of interest or annuities.

The war was no sooner over, and the national expence diminished, than money began to regorge in the hands of the monied interest: an infallible consequence of such a violent revolution, when extraneous circumstances, such as occurred after the peace 1763, do not prevent it.

To profit of this conjuncture, government, early in 1749, proposed that all the public creditors upon capitals bearing 4 per cent. interest, redeemable by parliament, and amounting to upwards of 57 millions, who should accept of 3 per cent. from December 1757, should have their debts made irredeemable until that time; and in the interval should continue to have 4 per cent. till December 1750; and 3½ per cent. from thence, until the total reduction to per cent. in December 1757.