The Simplified Wealth of Nations of Adam Smith, Book 5, Chapter 3: Perpetual funding
Chapter 3b: Anticipations and Perpetual Funding
13 In Great Britain, the land and malt taxes are regularly anticipated every year by a borrowing clause.
This clause is constantly inserted into the acts which impose those taxes.
The Bank of England advances to government the total amount of those taxes at 3-8% interest.
It receives payment as the taxes come in.
Any deficiency is offset by the tax proceeds of the next year.
The only remaining unmortgaged public revenue is thus spent before it comes in.
The state constantly borrows from its own agents.
It pays interest for the use of its own money.
It is like an improvident spendthrift whose immediate needs do not allow him to wait for his regular revenue.
14 In the reign of King William and Queen Anne perpetual funding was not yet familiar.
Most of the new taxes were imposed for a short time, from four to seven years only.
Most of the yearly grants consisted in loans anticipating the proceeds of those taxes.
The proceeds were frequently insufficient for paying the principal and the interest of the money borrowed.
It became necessary to prolong the term.
15 In 1697, by the 8th of William III., c. 20, the deficiencies of several taxes were charged on the first general mortgage or fund. [first anticipation]
It consisted of a prolongation of several taxes to August 1, 1706.
Their proceeds was accumulated into one general fund.
The deficiencies charged on this prolonged term was £5,160,459.
16 In 1701, those duties with some others, were further prolonged until August 1, 1710 for the same purposes.
This was called the second general mortgage or fund.
Its deficiencies were £2,055,999.
17 In 1707, those duties were further prolonged as a fund for new loans to August 1, 1712.
It was called the third general mortgage or fund. [second anticipation]
The sum borrowed on it was £983,254.
18 In 1708, those duties were all further continued as a fund for new loans to August 1, 1714 except for:
the Old Subsidy of Tonnage and the Poundage
only one part made it into this fund
an import duty on Scotch linen which was removed by the Articles of Union
It was called the fourth general mortgage or fund. [third anticipation]
The sum borrowed on it was £925,176.
19 In 1709, those duties were all continued to August 1, 1716 except for the Old Subsidy of Tonnage and Poundage which was now all left out of this fund.
It was called the fifth general mortgage or fund.
The sum borrowed on it was £922,029.
20 In 1710, those duties were again prolonged to August 1, 1720.
It was called the sixth general mortgage or fund.
The sum borrowed on it was £1,296,552.
21 In 1711, the same duties, with several others, were continued forever.
By then, those duties were thus subject to four anticipations.
It made a fund which paid the interest of the South Sea Company's capital. [fourth anticipation]
In 1711, that Company loaned £9,177,967 to government.
It was the greatest loan ever made at that time.
22 Before this period, the only perpetual debts were the money advanced to government by:
the Bank of England
The bank fund at this time was £3,375,027.
It was paid an annuity or interest of £206,501.
The bank fund was at 6% interest.
the East India Company
The East India fund was £3,200,000.
It was paid an annuity or interest of £160,000
The East India fund was at 5% interest.
what was supposed to be advanced a projected land bank, but was never advanced
23 In 1715, by the 1st of George I., c. 12, the taxes mortgaged for paying the bank annuity were accumulated into one common fund called The Aggregate Fund.
It included other taxes which this act also rendered perpetual.
It was charged with the payments of the annuities.
This fund was then increased by the 3rd of George I., c. 8, and by the 5th of George I., c. 3.
The duties added to it were also rendered perpetual.
24 In 1717, by the 3rd of George I., c. 7, several other taxes were rendered perpetual and accumulated into another common fund, called The General Fund.
It was for paying certain annuities totalling £724,849.
25 Because of those different acts, most of the taxes which before were only anticipated for a few years were rendered perpetual.
It was used as a fund for paying only the interest of the money previously borrowed by successive anticipations.
26 Had money only been raised by anticipation, the public revenue would have been liberated after a few years.
It would not need any other government attention besides that of:
not charging it with more debt than it could pay within the limited term
not anticipating a second time before the expiration of the first anticipation
But most European governments have been incapable of those attentions:
They have frequently overloaded the fund on the first anticipation, or
They have generally taken care to overload it by anticipating a second and a third time before the expiration of the first anticipation.
In this way, the fund becomes insufficient to pay the principal and the interest.
It became necessary to charge it with only:
the interest, or
a perpetual annuity equal to the interest
Such improvident anticipations gave birth to the more ruinous practice of perpetual funding.
This practice puts off the liberation of the public revenue from a fixed period to an indefinite period, never likely to come.
However, it raises more money than the old practice of anticipation.
When men became familiar with funding, it became universally preferred to anticipation during great state exigencies.
Relieving the present exigency is always the object of government.
The future liberation of the public revenue they leave to the care of posterity.
27 During the reign of Queen Anne, the market interest rate fell from 6% to 5%.
In the 12th year of her reign, 5% was declared the highest lawful rate for money borrowed on private security.
Like the creditors of private people, the creditors of the government were induced to accept 5% for the interest of their money after the temporary taxes were rendered perpetual and distributed into the Aggregate, South Sea, and General Funds.
It created 1% saving on the capital of most debts funded for perpetuity, or of 1/6 of most of the annuities paid out of those three great funds. [6% market interest - 5% legal interest]
This saving left a big surplus in the proceeds of the taxes accumulated into those funds over what was needed for paying their annuities.
It laid the foundation for the Sinking Fund.
In 1717, it was £323,434.
In 1727, the interest of most of the public debts was reduced to 4%.
In 1753 and 1757, it was reduced to 3.5-3%.
It further increased the sinking fund.
28A sinking fund is instituted for the payment of old debts.
However, it very much facilitates the contracting of new debts.
It is a subsidiary fund always at hand to be mortgaged to help any other doubtful fund for a state exigency.
I will show gradually whether this sinking fund was more frequently applied to pay old debts or contract new ones.