TOPICS OF THE DAY.
THE STATE AND THE PUBLIC CREDITOR.
OUR first duty towards the Public Creditor is to deter- mine that, come what may, the nation shall pay its Debt and keep faith with those who have helped it. That is not merely the path of honour and truth. It is the path of safety. If we were to repudiate the Debt, or to indulge in any policy which partook of the nature of repudiation, the ruin of the nation would be assured. We should break the confidence upon which our economic strength is founded, and with that break in confidence would come a commercial ruin which would literally mean for us a famine and an agony as great as, but even more intensified than, that which now holds Russia in its grip. The talk about the weight of the Debt is greatly exaggerated. We can endure it perfectly well if we have the strength of character to face it, and not to be frightened at its portentous figures. The vast Debt means no doubt very heavy taxation for all classes, and that of course is a burden, but it is a burden which can be borne. Meanwhile the paying of the Debt means economically a transfer of property from the old property-holders to the new property-holders, and also new types of property, rather than a destruction of property. Proof of this is to be found in the fact that the value of almost all shares with fixed rates of interest, like Consols and Debentures, has fallen enormously, and that the rate of interest obtainable by the man who is content with reasonable and moderate security is very nearly double what it used to be.
Speaking generally, and subject to the rule that there can be no absolute statement on the matter, it is true to say that the expenditure of each year of the war was paid for in that year by extra efforts and by the stopping of expenditure on other things and other investments. All savings went into the war, either in loans or in increased taxation, and therefore, as we have said, what we are faced with is rather a differentiation in the holding of the capital of the nation and in its nature and amount than a dead loss. Many people are poorer and many people are richer, but, granted that we honestly go on paying our debts and go on working steadily, as we believe we shall in spite of unemployment doles, we shall, when regarded as a national unit, recover from this war as we have recovered from previous wars.
All that we have just said would seem to be an argument for not bothering about the National Debt, but for regarding it with that kind of fatuous satisfaction with which our forbears regarded it--a satisfaction reflected in the celebrated passage in Macaulay where he talks about the benefits of the National Debt, and about the charming houses in the suburbs to which the debt-holders retire, houses embowered, if we remember rightly, " in their gay little paradises of lilac and laburnum." People might expect us, in fact, to be quite pleased that the " gay little paradises " have increased ncreased by the difference between £800,000,000 and £8,000,000,000 of national indebtedness. All the same, we are anxious to see the burden of the National Debt reduced, and some scheme arranged under which redemption will take place. We want this mainly because we believe that extremely high taxation such as we have got now is a waste, and therefore an evil, and also because it is in- evitable that the activities of the State and of the Munici- palities will largely increase in the future, and this means more borrowing. But if we borrow more and do not pay off, that would mean a further large rise in the rate of interest and an injury to private enterprise owing to the absorption of the Money Market by Government trans- actions. In view of these considerations, therefore, we are as anxious as the strictest economist to see the Debt problem tackled in earnest.
We are not going to indulge in the metaphysics of the Sinking Fund, or at any rate only to a very limited extent. We hold, indeed, that elaborate statutory Sinking Funds are of very little good, because they are almost certain to be suspended, indeed are bound to be suspended, in case of any great national need. Further, we do not think that the old system of piecemeal redemption, for such it really was, is satisfactory. The redemption of which we
speak is the plan under which, when the Government had got a realiied surplus, they went into the market and bought out a certain amount of Consols, thus tending always to raise prices against themselves. What we favour is a system which we believe always attracted Mr. Pitt, though he was not able to carry it out, a system which does not exactly create a Sinking Fund, though it partakes of that nature. Above all, it is a system which is automatic in its action, and yet does not impose an intolerable burden on the men and women of the present for the benefit of the men and women of the future. What we desire, and what in our opinion we ought to have done before now, is to adopt a system of borrowing in terminable rather than in perpetual annuities. We could have done this if we had chosen, and we could do it even now for a very large portion of the Debt. It is one of the commonplace paradoxes, or, to speak more accurately, facts, of our economic life that a man will pay practically as good a price for a ninety-nine-years' lease as he will for a freehold. We' all remember the young wife in Punch with a baby on her knee, to whom comes her husband with the news that he has just bought a ninety-nine-years' lease of their new house. Instead of the mother being as delighted as the father at the signing of the deeds, she exclaims : " Oh, how terrible ! Think of poor Baby being turned out when he is ninety-nine, and very likely ill as well as old ! " The ordinary man, how- ever, has a less vivid imagination, and to him, if he can secure his property for ninety nine years, there seems little need to bother about what is going to happen after that date.
In all probability then, if the State had only offered to borrow on the principle of London leaseholds—i.e., for ninety-nine years rather than for perpetuity—it would have got almost as good terms as it actually did get. It could easily have shown the prospective lender that it was doing him no injury by its offer. The State would say : " Don't be alarmed at your annuity coming to an end in ninety-nine years. There will be practically no depreciation in the firstthirty-five years, and after that the depreciation will be so gradual that you and your heirs will not notice it. Besides, if you are scrupulous about the matter, you have only got to make a Sinking Fund. This can be easily arranged for you. At the present high rate at which money can be invested, only a very small sum a year has got to be put aside to make a fund which in a hundred years will produce £100." If the Government were to add, say, one-tenth of £1 to the existing interest given on every £100 of the Debt, but at the same time to turn the• perpetual annuity into an annuity for one hundred years, they would be doing no harm to the creditor of the State ; that is, they would be keeping their bond with him, only as it were returning him a small piece of the loan each year. The figures of course are so big that even the addition of only two shillings to the interest paid on every £103 throughout six thousand millions of the National Debt would increase the burden of the Debt by, say, £6,000,030 a year : but that, it must be admitted, would not be a very large amount to devote every year to the repayment of the Debt. Yet we hold it would be sufficient. For the first thirty-five years no doubt we should appear to be ,doing nothing in the way of reducing the capital sum of the Debt. But as soon as the National Debt had only sixty-five years to run, the Govern- ment would begin to find a certain relaxation ; and by the time there were only thirty years of the terminable annuities to run, it would be extremely easy to deal with them in such a way as to reduce the burden of interest. Large sums of money could be raised to get an exten- sion of, say, another twenty years, just as is done in the case of Crown leaseholds. And here it may be noted that as long as the present rate of taxation was maintained in Income Tax, Super Tax, and Death Duties, the burden of the State in increasing the rate of interest, though nominally £8,000,000, would not really be more than, say, some £3,000,000 a year. That however, we admit, is a somewhat delusive, and therefore dangerous, form of calculation.
Before we proceed, and in case we have not made our point clear to the plain man, we may give shortly another method of exposition. _Let the _plain man of our. thought turn in any book of referent,* td the section which deals with savings, compound interest, and the making of Sinking Funds, and he will probably find a table headed " Present Value of a Lease Freehold or Annuity." The table will tell him what is the present value of an annuity of £1 accumulated at various rates of interest for a varying number of years. If he takes the 6 per cent. table, he will find that a terminable annuity of £1 which is to finish in a hundred years is worth £16.62 ; whereas a perpetual or unending annuity of £1 is only worth £16.66.
If we assume a Government converted in principle to our scheme of abandoning formal Sinking Funds, or the purchase of the State's own stock spasmodically or at regular intervals, what is the method on which they should act ? Whenever one of the fixed periods provided in one of the new contracts with the State creditor arrives, whether in the case of actual War Loan, Savings Certificates, or War Bonds, the Government should say to the State creditor: " We propose, instead of funding your £100 Bond or £100 block of .WarrLoan by giving you a perpetual annuity, to give you a terminable annuity for one hundred years. In addition to giving you 5} per cent. on each £100, we shall add one-tenth of a pound to each annual payment of interest to you. If you are dissatisfied with this arrangement, you can make out of the extra interest a Sinking Fund for yourself. And if you say this is not fair we will set up a Statutory Commission entitled ' The Sinking Fund Commission,' which will undertake the work of founding a Sinking Fund for you, provided you give us an order to pay the extra rate of interest to the said Coinmissioners rather than to yourself."
Another, and perhaps a better, way (for we keep always before us the absolute necessity of maintaining complete faith with the national creditor) would he to tell him that he still can have a perpetual bond if he wishes it. We would, however, in that case make a strong appeal to all patriotic people to take the terminable annuity rather than force the Government to issue perpetual stock. If the able men who now arrange the Lean advertisements were to put the matter plainly before the public as a patriotic duty, we believe that there would be a general willingness to fall in with the Government scheme, and to accept without any further demur, as a complete carrying out of the State's bargain, the amount of additional interest required to amortize the Loan in a hundred years, and so to do all, to use a Hiberniani.sm, that the silent voices of posterity can demand from us.
We have one more suggestion to make in regard to the Loan. It is that in addition to using the ninety-nine-year or hundred-year terminable annuities, the Government should introduce an attractive form of short terminable annuities with high rates of interest, and again popularize these by a wide system of advertisement The increasing Death Duties are turning men's minds very much to the purchase of annuities, and it is just as well that the Govern- ment should have a share in, and benefit by, this new develop- ment as well as the insurance companies. In our opinion, the Government should not merely sell life annuities, or annuities for a fixed term, but should also sell what would prove very popular—i.e., annuities which should run for life or for a fixed term of years, Whichever should be the longer. We believe that a good many childless men, or men who had provided otherwise for their wives and children, would be very willing to give up their capital in exchange for a life annuity under an attractive form of interest, especially if they knew that by doing so they were helPing to diminish the National Debt. When the life annuity fell in the money should pass, not into the general Exchequer, but to the Commissioners for the Reduction of National Debt. This is of course a form of amortiza- tion which has long been in use. All we suggest is that the new power which the Government have discovered in large advertisement should be employed in the work of Loan reduction, We must end as we began by exhorting all whom these words reach not to get " woozcy," as the Ameri- cans say, over the National Debt, but to remember that, though it imposes upon the nation extra burdens and extra duties, there is nothing fatal or terrible about it, and that it is only a danger which would tempt Wild, unbalanced, or predatory people to the crime of repudiation. •
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