Chapter 3c: Annuitues
Translator's note: To make large number simpler, the shillings and pences have been removed in some amounts.
Besides borrowing by anticipations and perpetual funding, there are two other methods in between them:
- Borrowing on annuities for terms of years
- Borrowing on annuities for lives
During the reigns of King William and Queen Anne, large sums were frequently borrowed on annuities for terms of years which varied.
- In 1691, an act was passed for borrowing £1 million on annuities for lives, on very advantageous terms.
- But the subscription was not filled up.
- In 1692, the deficiency was made good by borrowing on annuities for lives at 14%, or at little more than seven years purchase.
- In 1693, an act was passed for borrowing £1 million on an annuity of 14%, or of £140,000 a year for 16 years.
- In 1695, those who bought those annuities were allowed to exchange them for other anuities of 96 years after paying £63 per hundred into the Exchequer.
- The difference between 14% for life and 14% for 96 years was sold for £63, or for 4.5 years purchase.
- Such was the government's instability that even these terms procured few purchasers.
- In the reign of Queen Anne, money was borrowed on:
- annuities for lives, and
- annuities for terms of 32, 89, 98, and 99 years
- In 1719, the proprietors of the annuities for 32 years were induced to accept, in lieu of them:
- South Sea stock amounting to 11.5 years purchase of the annuities, with
- an additional stock equal to the arrears then due on them
- In 1720, most of the other annuities for terms of years were subscribed into the same fund.
- The long annuities at that time was £666,821 a year.
- On January 5, 1775, the remainder, or what was not subscribed at that time, was only £136,453.
During the two wars which began in 1739 and 1755, little money was borrowed on annuities for terms of years, or on those for lives.
- An annuity for 98 or 99 years is worth nearly as much money as a perpetuity.
- It should be a fund for borrowing nearly as much.
- But people who buy public stocks would not care to buy stocks with continually diminishing value.
- Such people make a very big part of the stock proprietors and buyers.
- A long term annuity, with the same intrinsic value as a perpetual annuity, will not find the same number of buyers.
- The subscribers to a new loan generally want to sell their subscriptions as soon as possible.
- They greatly prefer a perpetual annuity redeemable by Parliament over an irredeemable annuity for a long term of years of equal amount.
- The value of the perpetual annuity may be always the same.
- It therefore makes a more convenient transferable stock than the an annuity for years.
During those two wars, annuities were granted as premiums to the subscribers to a new loan.
- These annuities were the amount over and above the loan's projected interest.
- They served as an additional encouragement to the lender, not as a fund for borrowed money.
Annuities for lives was granted in two ways:
- on separate lives
- on lots of lives
In French, these are called tontines
, from the name of their inventor.
- When annuities are granted on separate lives, the death of every annuitant disburdens the public revenue as far as it was affected by his annuity.
- When annuities are granted on tontines, the liberation of the public revenue does not start until the death of all annuitants as one lot.
- A lot may consist of 20 or 30 persons.
- The survivors succeed to the annuities of all those who die before them.
- The last survivor succeeds to the annuities of the whole lot.
- More money can always be raised by tontines than by annuities for separate lives.
- An annuity, with a right of survivorship, is really worth more than an equal annuity for a separate life.
- Such an annuity sells for more than it is worth because of the confidence every man naturally has in his own good fortune.
- This is the principle of the success of all lotteries.
- In countries where governments raise money through annuities, tontines are preferred to annuities for separate lives.
- The expedient which will raise most money is almost always preferred to the expedient which will liberate the public revenue the quickest.
The type of lending used depends of the character and interest of the lenders
In France, a much greater proportion of the public debts consists in annuities for lives than in England.
- According to a memoir presented by the Parliament of Bordeaux to the king in 1764, the total French public debt was estimated at 2.4 billion livres.
- The capital granted for the annuities for lives was 300 million or 1/8 of the whole public debt.
- The interest of the whole debt was 120 million livres.
- The annuities were 30 million a year or 1/4 of the interest.
- These estimations are not exact.
- But since they were presented by a very respectable body as true approximations, they may be considered as exact.
- The different modes of borrowing of the French and English governments is not caused by their different degrees of anxiety for liberating the public revenue.
- It all arises from the different views and interests of the lenders.
In England, the seat of government is in the greatest mercantile city in the world.
- The merchants are generally the people who advance money to government.
- By advancing it, they mean to increase their mercantile capitals, not reduce it.
- They would never subscribe unless they expected to sell their share in the subscription in a new loan with some profit.
- If they purchased annuities for lives instead of perpetual annuities, they would not always be able to sell them with a profit.
- They would always sell annuities on their own lives with loss.
- Because no man will give the same price for an annuity on another's life, with the same age and health, for an annuity on his own life.
- An annuity on the life of a third person is of equal value to the buyer and the seller.
- But its real value begins to decline from the moment it is granted.
- It declines more as long as it exists.
- It can never be a transferable stock as convenient as a perpetual annuity, of which the real value is always the same.
In France, the seat of government is not in a great mercantile city.
- Merchants do not make up the people who advance money to government.
- The lenders for all public exigencies are made mostly of:
- finance people
- tax farmers general
- non-farm tax receivers
- court bankers, etc.
- Such people are commonly very wealthy and proud men of mean birth.
- They are too proud to marry their equals.
- Women of quality disdain to marry them.
- They frequently resolve to live as bachelors.
- They do not have families of their own nor much regard their relatives' families.
- They desire only to live in splendour during their own time.
- They are willing that their fortune should end with themselves.
- There are much more people in France who are averse to marry, or feel marriage to be inconvenient or improper, than in England.
- Such people have little or no care for posterity.
- It is most convenient for them to exchange their capital for a revenue that will last as long as they wish.
The ordinary expence of most modern governments in peacetime is nearly equal to their ordinary revenue.
- When war comes, they are unwilling and unable to increase their revenue to match their expence.
- Governments fear of offending the people.
- The people would be soon disgusted with the war because of the sudden increase of taxes.
- Governments do not know what taxes can produce the needed revenue.
- The facility of borrowing delivers them from the embarrassment brought by this fear and inability.
- Through borrowing, they can raise money from year to year with very moderate tax increases.
- Through perpetual funding, they can raise the largest sum with the smallest tax increases.
- In great empires, the people who live far from the action feel no inconvenience from the war.
- They enjoy reading the exploits of their own fleets and armies in the newspapers.
- To them, this amusement compensates the small difference between the wartime taxes and the peacetime taxes.
- They are commonly dissatisfied with the return of peace.
- It ends their:
- hopes of conquest and national glory from a longer war
The return of peace seldom relieves them from most of the wartime taxes.
39 The new taxes were imposed only to pay the interest.
- These taxes are mortgaged for the interest of the debt contracted for the war.
- If the new taxes produce some surplus after paying the debt's interest, this revenue might be converted into a sinking fund for paying off the debt.
- This often fails because:
- This sinking fund is altogether inadequate for paying the whole war debt within a reasonable time.
- This fund is almost always applied to other purposes.
- They are not intended nor expected to produce more.
- Any surplus would seldom be very considerable.
- Sinking funds generally arose more from a reduction of interest than from any surplus of taxes.
- Holland's sinking fund in 1655 and that of the ecclesiastical state in 1685 were formed this way.
- Hence the usual insufficiency of such funds.
During peacetime, various events require an extraordinary expence.
- Government finds it always more convenient to defray this expence by misapplying the sinking fund than by imposing a new tax.
- Every new tax is immediately felt by the people.
- It always creates some murmur and is met with some opposition.
- The more taxes are created, the higher the taxation.
- The more loudly the people complain of every new tax, the more difficult it becomes to:
- find out new subjects of taxation or
- raise the current taxes
- A momentary suspension of the debt payment is not immediately felt by the people.
- It creates no murmur or complaint.
- Borrowing from the sinking fund is always an obvious and easy way to gett out of the present difficulty.
- The more the public debts are accumulated, the more necessary it is to study to reduce them.
- The more dangerous it is to misapply the sinking fund.
- The less likely the public debt is reduced, the more likely it is for the sinking fund to be misapplied towards defraying all the extraordinary peacetime expences.
- When a nation is already overburdened with taxes, only the need of a new war, fueled by national vengeance or anxiety, can induce people to submit to a new tax.
- Hence the usual misapplication of the sinking fund.
In Great Britain, from the start of perpetual funding, the public debt reduction in peacetime was never proportional to its accumulation in wartime.
- Great Britain's present enormous debt was first laid by the Nine Years' War of 1688.
- That war was concluded by the Treaty of Ryswick in 1697.
On December 31 1697, Great Britain's public debts, funded and unfunded, was £21,515,742.
- Most of those debts were contracted on short anticipations.
- Some part was on annuities for lives.
- Before December 31, 1701, in less than four years, it was reduced by £5,121,041.
- This was a greater reduction of public debt than ever before, for so short a time.
- The remaining debt was only £16,394,701.
In the War of the Spanish Succession of 1709, concluded by the Treaty of Utrecht, the public debts further increased.
- On December 31, 1714, they amounted to £53,681,076.
- The subscription into the South Sea fund of the short and long annuities increased the capital of the public debts.
- On December 31, 1722 it amounted to £55,282,978.
- The reduction of the debt began in 1723.
- It went on so slowly that, by December 31, 1739 after 17 years of profound peace, the whole sum paid off was no more than £8,328,354.
- The capital of the public debt at that time was £46,954,623.
The debt increased because of the War of Jenkins' Ear, which began in 1739, and the War of the Austrian Succession which soon followed it.
- On December 31, 1748, the debt was at £78,293,313 after the war was concluded by the Treaty of Aix-la-Chapelle.
- The most profound peace of 17 years reduced the debt by only £8,328,354.
- A war of less than nine years added £31,338,689 to the debt.
During Mr. Pelham's prudent and truly patriotic administration [1743-1754]
, the interest of the public debt was reduced from 4% to 3%.
- The sinking fund was increased and some part of the public debt was paid off.
- In 1755, before the recent war, the funded debt of Great Britain was £72,289,673.
- On January 5, 1763, at the conclusion of the peace, the funded debt was £122,603,336.
- The unfunded debt was £13,927,589.
- But the expence created by the war did not end with the conclusion of the peace.
- On January 5, 1764, the funded debt was increased partly by:
- a new loan
- funding a part of the unfunded debt
- The funded debt rose to £129,586,789.
- According to the author of the Considerations on the Trade and Finances of Great Britain, there still remained an unfunded debt of £9,975,017.
- According to him, Great Britain's total public debt in 1764 was £139,516,807.
- The annuities for lives granted as premiums to the subscribers to the new loans in 1757, estimated at 14 years purchase, were valued at £472,500.
- The long-term annuities granted as premiums likewise in 1761 and 1762, estimated at 27.5 years purchase, were valued at £6,826,875.
- During a seven-year peace, Mr.Pelham's administration was unable to pay off an old debt of £6 million.
- During a war of nearly seven years, a new debt of more than £75 million was contracted.
On January 5, 1775, Great Britain's funded debt was £124,996,086.
- Its unfunded debt, exclusive of a large civil list debt, was £4,150,263.
- Funded and unfunded debt together was £129,146,322.
- According to this account, the whole debt paid off during an 11-year peace was only £10,415,474.
- Even this small debt reduction was not all made from the savings from the ordinary state revenue.
- Several extraneous sums, all independent of that ordinary revenue, contributed towards it:
- an additional shilling in the pound land-tax for three years
- the £2 million received from the East India Company as indemnification for their territorial acquisitions
- the £110,000 received from the bank for the renewal of their charter
- several other sums which should be considered as deductions from the recent war expences
- The principal of these sums are:
- The produce of French prizes: £690,449
- Composition for French prisoners: £670,000
- Amount received from the sale of the ceded islands: £95,500
- Total: £1,455,949
The total must be much more than £5 million if we add:
- the balance of the Earl of Chatham's and Mr. Calcraft's accounts
- other army savings of the same kind
- what was received from:
- the bank
- the East India Company
- the additional shilling in the pound land-tax.
Since the peace:
- the debt paid off, by the savings from the state's ordinary revenue, was less than £500,000 a year
- the sinking fund was much increased by:
- the debt which has been paid off
- the reduction of the redeemable 4-3%
- the annuities for lives which have fallen in
- If peace continued, £1 million might now be annually spared to discharge the debt
- Another million was paid in last year but, at the same time, a new civil list debt was left unpaid.
We are now involved in a new war which may be as expensive as our former wars.
- The new debt which will probably be contracted before the end of the next campaign might be nearly equal to all the old debt paid off.
- It would be vain to expect that the public debt should ever be completely discharged by any savings from the present ordinary revenue.
- During an 11-year peace, little more than £10 million of debt was paid.
- During a seven-year war, more than £100 million was contracted.
One author represented the public funds of indebted European nations as the accumulation of a great capital superadded to the capitals of other countries.
49 When a revenue is raised within the year from free or unmortgaged taxes, private revenue is turned away from maintaining one species of unproductive labour towards maintaining another.
- This debt:
- extends its trade
- multiplies its manufactures
- improves its lands much beyond what the country's capital could do alone
- He does not consider that the capital which the first public creditors advanced to government was a portion of the national produce turned away from serving as a capital to serve as a revenue.
- As a debt, this capital is turned from maintaining productive labourers to maintain unproductive ones.
- This capital is spent and wasted within a year, without any future reproduction.
- In return for the capital they advanced, the creditors obtained an annuity in the public funds of more than equal value.
- This annuity replaced their capital.
- They were enabled to:
- carry on their trade and business to a greater extent than before
- borrow new capital from other people on the credit of this annuity or
- sell the credit of this annuity to get a new capital from other people equal or superior to the capital they advanced to government
- However, this new capital which they bought or borrowed from other people must have existed in the country before.
- It must have been employed, as all capitals are, in maintaining productive labour.
- When it came into the hands of those who had advanced their money to government, though it was a new capital to them, it was not a new capital to the country.
- It was just a capital withdrawn from certain employments to be turned towards others.
- It replaced to them what they had advanced to government, but it did not replace it to the country.
- Had they not advanced this capital to government, there would have been two capitals in the country.
- There would have been two portions of the annual produce instead of one, employed in maintaining productive labour.
50 When the public expence is defrayed by funding, it is defrayed by the annual destruction of some capital which existed in the country before.
- Some part of what they pay in those taxes might no doubt have been accumulated into capital.
- It might have been employed in maintaining productive labour.
- But most would probably have been spent.
- It would have maintained unproductive labour.
- When the public expence is defrayed in this way, it no doubt hinders further capital accumulation.
- But it does not necessarily destroy any existing capital.
51 The system of funding only has this advantage over the system of direct taxation during a long war.
- It perverts some of the produce which maintained productive labour, towards maintaining unproductive labour.
- However, funding makes taxes lighter.
- The private revenue of individuals is less burdened.
- Consequently, their ability to save and accumulate that revenue into capital is less impaired.
- Though perpetual funding destroys more old capital, it does not hinder the accumulation of new capital as much as a direct tax for defraying the whole annual public expence does.
- Under the system of funding, the frugality and industry of private people can more easily repair the waste and extravagance that government brings to the society's general capital.
52 When funding has made a certain progress, the multiplication of taxes that goes with it impairs private people from accumulating in peacetime, as direct taxation impairs in wartime.
- Were the war's cost to be always defrayed by a revenue raised within the year, the taxes for that revenue would last no longer than the war.
- The ability of private people to accumulate would be less during the war.
- It would however have been greater during the peace than under the system of funding.
- Under the system of direct taxation, war would not necessarily cause the destruction of any old capitals.
- Peace would have caused the accumulation of many more new capitals.
- In general, wars would be:
- more speedily concluded
- less wantonly undertaken
- The people would feel the complete burden of war during the war.
- They would soon grow weary of it.
- Government would then not need to carry it on longer than necessary.
- The foresight of the heavy burdens of war would hinder people from wantonly calling for it when there was no real interest to fight for.
- Wars would:
- occur more rarely
- be shorter
- Under the system of funding, on the contrary, wars would be:
- undertaken in the highest vigour
- much longer than they can well be
- Great Britain's peace revenue is currently more than £10 million a year.
- If free and unmortgaged, it might be enough to carry on the most vigorous war, with proper management and without contracting new debt.
- The pernicious system of funding encumbers, in peacetime as it encumbers in wartime, the British people's:
- private revenue, and
- ability to accumulate.
It has been said that in paying the interest of the public debt, it is the right hand which pays the left.
- The money does not go out of the country.
- It is only a part of the revenue of one set of people which is transferred to another.
- The nation is not a tiny bit poorer.
- This apology is all founded in the sophistry of the mercantile system.
- It supposes that the whole public debt is because of the people, which is not true.
- The Dutch and other nations have a very big share in our public funds.
- Even if the whole debt was due to the people, it would not be less pernicious.
Next: Chapter 3d: Bad Effects of Funding