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The Columbia University Libraries reserve the right to refuse to accept a copying order if, in its judgement, fulfillment of the order would involve violation of the copyright law. Author: Fisk J Harvey Edward Title: English public finance from the revolution of. Place: New York Date: 1920 ^r- ^ZfO^'l? MASTER NEGATIVE # COLUMBIA UNIVERSITY LIBRARIES PRESERVATION DIVISION BIBLIOGRAPHIC MICROFORM TARGET ORIGINAL MATERIAL AS FILMED - EXISTING BIBLIOGRAPHIC RECORD kjM^i^,^ — * ««■** -MMw I iJ«wwi>i>. BUSINESS 6^.2 F54 Fisk, Harvey Edward, 1856- English public finance from the revolution of 1688, with chapters on the Bank of England, by Harvey E. Fisk. New York, Bankers trust company, 1920. 3 p. 1., 241 p. 18«. On cover : Bankers trust company publications. "Authorities" : p. 228-230. 1. Finance— Gt. Brit— Hist 2. Bank of England. 3. Debts, Public— Gt. Bdt. I. Bankers trust company, New York. u. Title. Library of Congress Copyright A 570436 O 20—11025 HJ1011.F5 [39q2] RESTRICTIONS ON USE: TECHNICAL MICROFORM DATA FILM SIZE: . 3yhnn REDUCTION RATIO ■.Ik DATE FILMED :4£ fr TRACKING # : MSiJ 0^/tO IMAGE PLACEMENT: lA IB IIB INITIALS ■.2i^ FILMED BY PRESERVATION RESOURCES, BETHLEHEM, PA. 3 3 'JT* ** > ^^^ O m 0) > Ul o 3 3 o o 3 3 C/i O ^ J^isEPlsisisi IM CO bo o 00 o 1.0 mm 1.5 mm 2.0 mm ABCDEFGHIJKLMNOPQRSTUVWXYZ abcdefghi)klmnopqrstuvwxyz 1234567890 ABCDEFGHIJKLMNOPQRSTUVWXYZ abcclefghijklmnopqrstuvwxy2l234567890 ABCDEFGHIJKLMNOPQRSTUVWXYZ abcdefghijklmnopqrstuvwxyz 1234567890 2.5 mm ABCDEFGHIJKLMNOPQRSTUVWXYZ abcdefghijklmnopqrstuvwxyz 1234567890 ^ >S t <- <^^ V ^o ■& ■i. ^o f^ «• ,<<' s.« ;.<^ '^p :<9 ^O f^ m O Tj m om m > 3D O m w V"--:,'.,. \ \ GMSH PUBLIC FINANCE From the Revolution of 1688 ▼ ▼ Bankers Trust Company Publications t ■/.■ ■: :.| •.rr.l • t ;-. ■li' 'ifc- I *• '*>8 ii :i:;;i -u:?.; -i; r:DQ>3-^2. F^T LIBxv A.R. Y School of Business \ f f English Public Finance From the Revolution of 1688 . . With Chapters on The Bank of England 1 By Harvey E. Fisk > New York Bankers Tpusx,. Company I . t -.#11 i i » V u , « » <* . w V u • » v.. ^ e & t ,. • I «• J t ■ J ? i i @ JUN 1 1 1940 v_ ,/ DC.'fhZ Copyright by Bankers Trust Company New York, 1920 All rights reserved i * t % $ t * « « • • • • • I, » f • %■ * • « • < * • I ■ . • • • * ■ • * ^ ^* y " States, like individuals, who observe their engagements are respected and trusted." Alexander Hamilton. » THIS book IS intended to give in form for ready reference the sahent facts in regard to the finances of the United Kingdom. (^ The earlier chapters tell the financial story of the critical t period of the war from the fateful August 4, 1914, when war was declared, to the budget speech of Chancellor Chamber- lain on April 19, 1920, which so ably dealt with the financial \ problems of the reconstruction period. The later chapters discuss the revenue, expenditure and debt prior to 1914 and England's methods of financing from the time of William the I Conqueror. Present day financial methods are traced back to their origins in these early days. t The activities of the Bank of England are so closely inter- woven with the operations of the English Treasury that to apprehend clearly Great Britain's public finance one should have knowledge of the history, the functions and the opera- tions of the Bank, therefore several chapters have been de- voted to these matters. Almost without exception the statements of fact contained, in this book, especially those having to do with its main pur- pose — public finance — are based upon a study of official docu- ments. Where necessary to depend upon secondary sources care has been taken to refer only to those admittedly author- itative. We are hopeful that this book may contribute to a better understanding of Great Britain's present financial problems and how they are being solved, and that it may prove to be a useful work of reference for our friends. Bankers Trust Company. New York, June, 1920. 1 Contents ENGLISH PUBLIC FINANCE CHAPTER I "1920'' II "1914*' III War Costs and How They Were Met IV The War Debt V How the Banks Helped Finance the War VI The War Credit Structure VII Crown Finance VIII Revenues of the Anglo-Saxon Kings IX The King's Prerogative X Crown Revenues Subsequent to Norman Period XI Crown Debts XII Constitutional Government Devel- oped by Control of the Purse XIII England After the Revolution of 1688 XIV War and Debt XV Early Forms of Unfunded Debt XVI Early Forms of Funded Debt XVII State Lotteries and Lottery Loans XVIII The Sinking Funds XIX Early Refunding Operations XX Financing the Great French War XXI Revenue and Expenditure XXII Peace and Social Betterment XXIII The Ancient Exchequer XXIV The Modern Fiscal System XXV Concluding Thoughts and Deductions PAGE I 4 (1914-I920) 13 (1914-I920) 23 (1914-I920) 39 (1914-I920) 45 (1066-1688) 54 57 (1066-1688) 61 (1154-1688) 64 (1216-1688) 72 (1066-1688) n (168 8-1920) 86 (1688-1817) 91 (l 688-1707) 96 (1688-1727) lOI (1694- I 8 26) 108 (1717-1920) 116 (1739-1817) 121 (1793-1817) 124 (1688-1817) 136 (1817-1914) 141 ISO 154 ms 163 THE BANK OF ENGLAND CHAPTER I A Banking Evolution II The Genesis of Banking III The Early History of the Bank IV The Bank and the Great French War V The Joint-Stock Banks VI The Bank Charter Act of 1844 VII The Government of the Bank VIII The Scotch and Irish Banks (The Bank in the Great World War. For part taken see Chapter V, page 39. and Chapter VI. page 45.) PAGE 169 172 180 191 194 2CX) 206 Tables National Debt Statement, March 31, 1920 Quotations: Consols and Bank of England Stock: 1697-1919 British Funds: 19 10- 19 19 Money Rates Treasury Bills — Discount Rates England's Sovereigns Authorities 208 208 218 226 226 227 228 Index and Glossary 231 Note — ^All money statistics are in sterling. The following abbreviations are used in stating English Currency figures £» pound; s» shilling; d« penny. Thus £1 ids 7d— one pound sterling, ten shillings and seven pence. The specie equivalents in American money are £i« 14.86'/^; sa-24V^ cents; d» 2 cents. Statistical statements in the text and tables as a rule are given in rounded figures. English Public Finance Chapter I tt 1920 >> THE great world war of 1914-1919, officially terminated by the acceptance by H. M. King George V, on July 31, 19 1 9, of the Peace of Versailles, signed June 28, 1919, cost Great Britain over £10,000 million sterling. If we add to this sum the war expenditures of the British self-governing Dominions; Canada, £407 million; Australia, £379 million; New Zealand about £76 million; Union of South Africa, £60 million and little Newfoundland about £3 million; together with the war expenses of the Crown Colonies, and India's war expenditure of £20 million and contribution of £100 million, we arrive at a grand total for the British Empire of over £11,000 million. This was an expenditure made necessary by the war in excess of what would have been the expenditure for the period on the basis of the pre- war budget. An analysis of the total expenditure of the United King- dom from 1688 to 1920 discloses the amazing fact that for the six fiscal yearsy beginning March 31, 1914, and ending March 31, 1920, the expenditure of the Government actually exceeded the total expenditure for thef tzvo and a quarter tin making this comparison, however we should not lose sight of the fact that the purchasing power of the £ sterling has fluctuated greatly during this period and that, frequently, particularly in the early years, a given sum would procure much more in services and in commodities than would be the case today. This fact should be borne in mind all through these pages whereever similar money comparisons are made. [I 2] BANKERS TRUST COMPANY centuries preceding 1914. The exact figures are, for the 226 years £10,944 million, for the six years £11,268 million. The people of Great Britain paid into the coffers of the Government in taxes and other revenue collections over 36 per cent, of this vast sum of more than eleven thousand million sterling. The other 64 per cent, was borrowed. The war borrowings of Great Britain at their maximum, December 31, 1919, amounted at par value of securities issued to £7,368 million, £6,011 million furnished by her own people, £1,027 million borrowed in and from the United States and £330 million borrowed from other foreign nations and from the Dominions. On the other hand. Great Britain had then loaned to the Dominions £186 million and to her allies £1,666 million, so that the amount loaned abroad exceeded by £495 million the amount borrowed abroad. Thus we find that the 46 million people of the British Isles raised entirely from their own resources a net amount of £9,911 million, over £215 for each one of their number. For the active war period covering the five fiscal years end- ing March 31, IQ19, from 22>^ per cent, to 34K per cent, of the expenditure was raised from taxation, other revenue collections, and war contributions. In the fiscal year ended March 31, 1920, taxes and other revenue produced about 65 per cent, of the aggregate budget of £1,662 million while receipts from war contributions, sales of war property and income from trading undertakings j^ielded about 16 per cent., leaving less than 20 per cent, to be provided from loans. Indications now are that in the current fiscal year (1920- '21) the budget will balance not alone without any addition to the debt but, if the present plans of the Government materialize, with a substantial surplus for the reduction of debt. The Dominions have made an equally good or even better ENGLISH PUBLIC FINANCE [3 showing. Canada has taxed herself for nearly fifty per cent (48.10) of her total war time expenditure; Australia raised 40 per cent, from taxation and New Zealand appears to have raised 57 per cent, from taxation. The national wealth of Great Britain, or, as some economists prefer to say, the national capital, at the beginning of the war is estimated to have been £14,500 million. There has probably been no actual addition during the war. On the contrary, doubtless, there has been some depletion therein. However, measured by the paper pound sterling of today we may quite conservatively take £24,000 million as the figure with which to compare the £8,078 million to which the debt grew from the pre-war figure of £711 million; giv- ing us a ratio of say, 33^ per cent, of debt to wealth. The debt charge for interest and management is now about £360 million, comparing with £24 million before the war. The present-day charge is about ten per cent, of the national income estimated to be £3,600 million. Having in mind these statistics, so vast as to be almost beyond comprehension, it will be of interest to know the conditions under which they developed and the means used to handle the problems of war finance. ENGLISH PUBLIC FINANCE [5 Chapter II it 1914 >> TT was the turn of the business year. The cloud of pessi- -■- mism which had overhung the international finance markets since the outbreak of the Balkan wars in 191 2 seemed about to disappear. The half-yearly settlements had passed over smoothly in the chief money centers of Europe. The Bank of England and all the great central banks on the Continent were in strong credit condition. Some of these banks had accumu- lated reserves beyond anything hitherto known. In fact, the accumulations of gold were becoming so great as to indicate that a great revival in trade might be expected. Deposits in the banks of the United Kingdom were heavier than at any time in their history, amounting to about £1,150 mil- lion, an increase in the fifteen years since the beginning of the Boer War of over £300 million. The open market rate of discount in London had averaged in the previous six months £2 los per cent.; lower than for any year since 1908, when the average rate for the year was £2 5s 7d per cent.; and with that exception lower than at any period since 1898. This condition was in great contrast to that which had characterized the money markets in 191 2 and 1913 when the discount rates had been high — averaging £3 IIS 6d per cent, in the former year, and £4 6s lod per cent, in the latter year. These high rates in large part had been due to the heavy demands made upon the capital of the world for the expenses of the Balkan wars and the dislocation of trade through Southern Europe because of these wars and for the subsequent rehabilitation of the war-torn territorv 4] Commodity prices in these years had been high and invest- ment security prices low. With 1914 had come a change in this situation and events appeared to be favoring a revival in the securities markets, with less active commodities markets. England had enjoyed one of the best six months business on record in her foreign trade, even though it had been conducted on a somewhat lower price level than in the previous year. At the moment trade was quiet. It was estimated that during the half year England had invested over £100 million abroad. Her total investments abroad were estimated to be not less than £4,000 million, while her annual income from these investments, from freights paid for carrying foreign goods in British ships and from banking charges was estimated at £350 million. As we have already seen, her national debt was only £711 million, less than five per cent, of her estimated national wealth of £14,500 million. Therefore, from every point of view, England in July, 1914, was in a strong financial condition. Her people were prosperous. The welfare of even the humblest classes had been made the subject of important governmental action, while the Chancellor of the Exchequer, David Lloyd George, had given notice of his intention to bring forward a great program of land reform. Relations with her Overseas Empire were never closer or more cordial. Earnest efforts were being made to work out some plan for representation of the great Dominions in an Imperial Parliament or for some equivalent arrangement. The only serious political situation was the perennial one of Ireland, where preparations for armed resistance by the Ulsterites to Mr. Asquith's proposed Home Rule plans gave the Government considerable anxiety. 61 BANKERS TRUST COMPANY War Breaks — Emergency Measures On the 23rd of July came the news of Austria's peremp- tory ultimatum to Serbia. On the 25th Serbia's reply and on the 28th the startling advices that Austria-Hungary had de- clared war on Serbia. Money began to tighten ; the stock mar- kets became weak. On the ist of August, Germany and Russia were at war. The foreign bourses were in a state of panic. London and New York were the only important open mar- kets. They were flooded with international securities. Be- tween July 20th and July 30th Consols fell six points, India 3>^s four, French Rentes five, home rails from fiVe to fifteen points. American rails broke heavily. Canadian Pacific sold off 25>^ points. South Americans dropped from four to twenty-four points. Still England was not involved. On the following day the Stock Exchange closed. The newspapers of the day reported that "paralysis, not panic," was the word which defined conditions. On August ist France ordered a general mobilization following a peremptory note from Ger- many on July 31st demanding that she define her attitude within twelve hours. On this same day German troops occu- pied Luxemburg and on the 4th Germany had started her troops across Belgium. At 11 p. m. of the 4th Great Britain entered the lists in defense of Belgian neutrality in accord- ance with her treaty obligations. Fortunately for the financial world these events were taking place at the time of the London Bank Holiday which extended from Saturday, August ist, through Monday the 3rd. One of the first steps taken was to extend the holiday to the seventh. This gave time in which to take remedial measures. On July 31st the Bank rate had been raised to 8 per cent. On the following day it was raised to 10 per cent. ENGLISH PUBLIC FINANCE [7 Naturally on the eve of the holiday many people had required money for their week-end payments and holiday expenses. This caused a demand on the banks for gold, for it will be remembered Bank of England notes are not issued in denomi- nations of less than five pounds. The joint-stock banks declined to pay out gold, telling their patrons to go to the Bank of England. This unprecedented action very naturally frightened the public and stimulated their desire for gold, leading to heavy demands being made upon the Bank. During the extended holiday important steps were taken to insure the stability of the financial structure. The Currency Notes Provision was made to issue Government notes in denom- inations of £1 and of 10 shillings. They were issued by the Bank of England as agent. The plan was to lend a supply of such notes to each bank up to 20 per cent, of its deposits. For this advance the banks were to be taxed at the rate of 5 per cent, per annum upon the par value of the notes bor- rowed. The banks were thus provided with funds for over the counter payments. Clearing House Certificates For inter-bank transactions recourse was had to Clearing House Certificates a device adopted from American practise in times of special stress. These certificates were protected by the deposit of securities with the Clearing House. The Moratorium The next step was, on August 4th, to declare a limited moratorium — that is, a limited period during which creditors could not demand payment from those indebted to them. 8] BANKERS TRUST COMPANY ENGLISH PUBLIC FINANCE [9 This was at first for one month, afterward extended to three months. Protecting the Acceptance Market The most important action at this time was the provision made on August 13th, that the^Bank of England, under Gov- ernment guaranty against loss to itself for so doing, should discount pre-moratorium bills, whether drawn by enemy aliens or by others, without recourse to the holder, "giving the acceptor the opportunity until further notice of postponing payment, interest being payable in the meantime at 2 per cent, over bank rate/' This offer applied not only to such bills of exchange as were customarily discounted by the Bank but also to other good trade bills and foreign and colonial acceptances. A moment's reflection will show how all important this action was and also the importance of the subsequent arrange- ments for securing a free market for bills of exchange. For years London had been the banker for the world. The system of acceptances had helped to bring this about. If a cofi^ee grower in South America sold coffee to New York, or to Berlin; if a sugar producer in Cuba or in Java sold sugar in Constan- tinople or in Paris; if an Indian merchant sold articles of lux- ury; the Chinaman, tea; the American or the Egyptian, cotton, the settlements were almost invariably made through London. The Chinaman might sell his tea in New York, but he would arrange for payment through London. The New York tea buyer through his bank in New York would engage a London Acceptance House or Bank to pay the Chinese merchant by accepting a draft which that merchant would draw on the New York buyer through London. To meet his obligation the New Yorker would perhaps buy a bill which a wheat- grower in Minnesota was drawing on London to pay for wheat which had gone to France. These bills coming in from all parts of the world were mu- tually cancelling each other, while during the period they had to run they were considered the choicest, the most liquid asset, next to actual cash, which a bank could hold. If a bank required ^money to meet an unexpected demand it need only offer a block of bills in the market and thus could immediately obtain the funds required. When war, involving so many of the great mercantile na- tions, was unexpectedly declared, the banks suddenly found their assets " frozen'" — entirely unavailable. Worse than this, there were bills in transit which they and the acceptance houses were obligated to accept upon arrival and there were millions in value coming due day by day which they were obligated on behalf of clients to pay. Manifestly this was the great financial problem requiring instant attention. This situ- ation was met first of all as already stated, by providing a market with the Bank of England for the pre-moratorium bills. A few weeks later, on September 4th, this was followed by a further provision whereby acceptors who were unable to meet the pre-moratorium bills at maturity received the necessary funds from the Bank of England at 2 per cent, over Bank rate. By this process endorsers on the bill were released. The loans made to the accepting houses were, for the most part, to constitute a second and not a first claim upon their assets. This greatly increased the negotiability of post-moratorium bills accepted by the same houses. Treasury Bills Issued On August 19th tenders were asked for £15 million Treas- ury Bills to provide for the immediate needs of the Govern- lol BANKERS TRUST COMPANY ment in connection with these operations. These bills, dated August 22d, represented the first public issue of securities for financing the war. To obviate the risk of transporting gold across the ocean it was allowed to accumulate for account of the Bank of Eng- land in America at Ottawa, in South Africa at Cape Town, in Australia and in India. Credits were granted by .the Bank against such deposits. The Stock Exchange Loans These matters having been arranged it was necessary to protect the Stock Exchange situation. On October 31st Government measures of assistance were announced. These provided for the extension of bank loans to members of the Stock Exchange, until a year after the war, and with no in- crease in margin. Other lending institutions not able to give such long credits were permitted to obtain advances from the Bank of England on Stock Exchange securities up to 60 per cent of their value on July 27th. Such loans also were to run until a year after the war. Advances to Export Merchants On November 4th, a very interesting arrangement was made between the Government, the banks and the Associa- tion of Chambers of Commerce of the United Kingdom to promote the export trade. To solvent traders were to be advanced funds equivalent to 50 per cent, of moneys owing to them by debtors resident abroad, these advances to be used by the traders to continue their business and pay their commercial debts to other traders and manufacturers. It was understood that the moneys provided were not to be taken by the banks to reduce loans or overdrafts or to pay bank ENGLISH PUBLIC FINANCE [II acceptances but were to be solely a new credit free for meeting the purely trade obligations of the borrower and in pushing his business as rapidly as possible. Any loss was to be borne, 75 per cent, by the Government and 25 per cent, by the ac- cepting banks. Similarly, the cotton trade was encouraged. On Novem- ber 1 6th the Government arranged a fund to be used to en- able borrowers to meet market differences. The payment of the advances was guaranteed as to 50 per cent, by the Gov- ernment, 25 per cent, by the Liverpool Cotton Association, and 25 per cent, by the lending bank. Success Attending These Efforts Such were the principal emergency measures taken during 19 14 to insure as nearly as possible an uninterrupted progress of the banking and mercantile community. Although the moratorium was not formally declared ended until Novem- ber 4th, we have the word of Sir Edward Holden as authority that actually, as far as the banks were concerned, **they came from under it*' in September. The year closed with a heavy increase in deposits and with a large increase in the gold reserve of the Bank of England which after dropping from £40 million on July 15th to £27 million on August 8th, be- came £69 million December 30th. So that the proportion of reserve to liabilities after dropping from 52^^ per cent, in July, to I4>^ per cent, in August, increased to 33^^ per cent, on December 30th. At the close of the year money was a drug on the market — three months bills being quoted at 2f^ per cent. At the close of 1914 it was estimated that some £84 mil- lion of special loans of various kinds were being carried for the Government by the Bank. This total included pre- 12] BANKERS TRUST COMPANY moratorium bills, advances to traders and others after the expiration of the moratorium, sums lent on Stock Exchange securities, and so on. In addition, were the amounts being carried by the joint-stock banks. Chapter III War Costs and How They Were Met (1914-1920) TTAVING reviewed the financial measures adopted at the ^ -■• beginning of the war to save the general business situa- tion, and especially to protect the banks, let us turn to a consideration of the direct financing of the requirements of the Government itself. The immense figures involved are a matter of common knowledge. They are summarized as to the classes of expenditures and as to sources of receipts in the tabular statements printed below. These will be found to repay careful study. We may now. consider the financial methods used. Inflation Methods Used It must be frankly admitted that the expenses of the war were financed by inflation methods. Not, however, the same kind of inflation practised by all the Continental nations of immense issues of bank notes. England did issue non-inter- est bearing circulating notes — the Currency (Treasury) Notes already mentioned— but the aggregate of £356 million out- standing at the close of 19 19 looks very modest alongside of the billions of notes issued, for example, by the Bank of France. The inflation was of a more subtle kind but perhaps even more potent. It was inflation by the use of bank deposit credit. [13 14 1 BANKERS TRUST COMPANY ENGLISH PUBLIC FINANCE [15 Treasury Bills Our friend the Treasury Bill — successor to the Excheq- uer Bill of former times — and advances from the Bank of England on the credit of Ways and Means were the principal agencies used by the Government to transmute bank deposit credit into ships, aeroplanes, tanks, ordnance, munitions, food and clothing for the soldiers, separation allowances for their families and finally into a crushing defeat of the enemy. Taxation But the entire dependence has not by any means been placed upon this modern Alladin's lamp. Taxes have stead- ily increased. Where in the first year of the war they amounted to less than £200 million, they have since then mounted year by year until in the fiscal year ended March 3 1, 1920, they yielded nearly £1,000 million ! The principle upon which taxation has been based has been that the revenue receipts should at least provide for the ordinary peace budget and in addition for the interest upon the debt and for an annual sum to be applied to its reduction. This ideal has been fully realized and a good surplus in addition to apply toward the payment of the military and other special expenses caused by the war. The provision of a sinking fund, while the debt was a growing one, may be criticised as chimerical but doubtless it served a useful purpose as a fund to regulate the market for the war bonds; also the fact that, at the time of incurring the debt, provision was made for its ultimate pay- ment probably had a real value in establishing confidence in the obligations of the nation. During the six years under review the income from taxation and from non-tax revenue, other than that from borrowings provided approximately for 35 per cent, of the first yearns disbursements, 22 percent, of the second year's, over a quarter of the third and fourth year's disbursements, over a third of those of the fifth year and for more than 80 per cent, of last fiscal year's expenses. Expenditure of War Period The total expenditure for the six years of the war period — that is, for the fiscal period beginning March 31, 1914, and ending March 31, 1920 aggregated £11,268 million. Of this wartime expenditure £3,605 million was met from normal revenue receipts; £466 million from war contributions, re- ceipts from sales of war property and receipts from trading undertakings; while £7,196 million came from borrowing, or in the proportions of 36.13 per cent, from revenue of all kinds and 63.87 per cent, from borrowing. Truly stupendous figures and a creditable result and one which gives great confidence to the investor in the nation's bonds. All classes of taxation have been made to contribute to this result, but the great dependence of the Exchequer has been placed upon the property and income tax and its modern run-* ning mate, the excess profits duty. Englishmen and their newspaper editors delight in heckling and finding fault with the Administration, as we would say; the Government, as they say. But to the observer 3,000 miles away, quietly studying the figures without any other object than to get at the facts, the results achieved seem little short of marvelous. They could only be obtained in a country where patriotism runs so high that the people demand to be taxed and taxed heavily, as we are assured was the case in England during the course of the war. The following comparative tables of i61 BANKERS TRUST COMPANY ENGLISH PUBLIC FINANCE ['17 income and expenditure for the six fiscal years 19 14 to 1920, inclusive, summarize these data: GOVERNMENT INCOME— WORLD WAR PERIOD March 31, 1914 to March 31, 1920 In Millions Sterling Pet Cent. Years Ended 191S 1916 1917 1918 1919 1920 Total Aver- Total March 31 • age Rev- enue Exchequer balance 10 83 26 26 21 13 10 Tax Revenue Customs 39 60 71 71 103 149 493 82 12.06 Excise 4a 61 56 39 60 133 392 65 9.59 Estate duties 28 31 31 32 30 41 193 32 4.72 Stamps 8 7 8 8 12 23 66 II 1.63 Land, house, etc. 3 3 3 3 3 4 18 3 .45 Property and in- - come, including super-tax 69 128 205 240 291 359 1,292 215 31.72 Excess Profits •• 140 220 285 290 935 156 23.01 Total Tax 189 290 514 613 784 999 3.389 565 83.18 p Post-ofi&ce 29 34 34 35 40 44 216 36 5.31 fSundry 8 13 25 59 65 296 466 77 II. 51 Total revenue 226 337 573 707 889 1,339 4,071 678 100.00 Borrowing net 410 1,167 1,629 1,985 1,682 323 7,196 1,199 Total net receipts 636 1,604 2,202 2,692 2,571 1,662 11,267 1,878 Total resources 646 1.587 2,228 2.718 2.592 1.675 11,277 Revenue % Receipts 35. S3 22.40 26.02 26.26 34.58 80.56 36.13 Borrowing % Receipts 64.47 77.59 73.98 73.74 65.42 19.44 63.87 GOVERNMENT EXPENDITURE-PERIOD OF THE WORLD WAR March 31, 1914 to March 31, 1920 In Millions Sterling Per Years Ended Grand Aver- Cent. March 31 1915 1916 1917 1918 1919 •1920 Total age of Total Debt — Interest and Management 22 60 127 190 270 332 1,001 166 8.89 Military and other special war ex- pense 437 1,399 1,974 2,403 2,198 1,146 9.557 1.593 84.81 Civil Government 78 75 75 78 85 140 531 8^ 4.70 Post-office 26 27 26 26 26 48 179 30 1 .60 Total Expenditure 563 1,561 2,202 2,697 2,579 1,666 11,268 1,878 100.00 Exchequer balance 83 26 26 21 13 9 9 To be accounted for 646 1,587 2,228 2.718 2,592 1,675 11,277 ♦♦£140.000. flncluding war contributions from India, and other over-seas colonies and depen- dencies; also receipts from sales of war property and from trading undertakings, etc. *Division of expenses partly estimated. Six vs. 226 Years Expenditure To grasp the full significance of these figures we may ad- vantageously compare them with the cost of government for a previous period. In endeavoring to make such a compari- son we have brought out the startling fact to which reference has already been made that the expenditure of the six years of the war exceeded the aggregate expenditure of the preced- ing two and a quarter centuries. The table following visualizes this statement. In looking at the figures bear in mind that during the long period of 226 years there were eight major wars, fought at great expense — expense so great that the thinking people of the times were appalled thereby. Be- sides these major wars there were many costly military i8] BANKERS TRUST COMPANY expeditions, the growing cost of civil government and the ever present burden of the public debt. Here are the figures: GOVERNMENT EXPENDITURE In Millions Sterling Civil Mili- Debt Govt. tary Charge Total aX Centuries (1688-1914) . 2,873 4,524 3,547 10.944 6 Years (1915-1920) ... 710 9,557 1,001 11,268 Total (1688-1920) 3,583 14,081 4,548 22,212 This is the burden which German lust for power and ter- ritory placed on one only of the antagonists. Fortunately England has the ability to cope even with such a burden, but it will require the co-operative work and savings of more than one generation to liquidate the £7,367 million of increased debt which the war has left as its aftermath. The Budget^ ig20'ig2i On April 19, 1920, Mr. Austen Chamberlain, Chancellor of the Exchequer, presented to Parliament the budget for the current year to end March 31, 1921. In this connection Mr. Chamberlain said: "It is recognized on all hands that the present financial year is of great importance in the history of Europe, and not least for those nations who emerged victori- ous. Eighteen months have elapsed since the preliminaries of peace were signed. Though peace follows on limping foot- steps the time must come when each of us should set his house in order, and, not content merely with facing present necessi- ties, lay broad and deep the foundations of future credit and prosperity. This budget is, therefore, a critical one. The paper in the hands of members gives details of the result of the past financial year.'' ENGLISH PUBLIC FINANCE [19 The paper referred to by Mr. Chamberlain is the financial statement always laid before the House by the Chancellor of the Exchequer when opening the budget. The budget sys- tem of Great Britain is described in a subsequent chapter. As we have already surveyed the finances for the past year we may proceed at once to consider the estimates for the cur- rent year to end March 31, 19 21. These contemplate a total expenditure of £1,184 million and receipts of £1,418 million. The budget provides for ex- penses of £481 million less than the actual expenses of last year and for an estimated increase in revenue from all sources except borrowing of about £79 million or an improved status of the finances as compared with the past year of £560 million. Therefore, while the financing of the past year re- sulted in a deficit of £3 26 million, most of which had to be made up by new borrowing, it is expected that in the current year there will be a surplus of £234 million which can be applied to the reduction of indebtedness. In order to accomplish this result Mr. Chamberlain an- nounced that it would be necessary not only to continue the unpopular excess profits tax of 40 per cent., but to increase this tax to 60 per cent. In this connection Mr. Chamberlain said: "I base my justification for the proposal on the con- tinued prevalence of temporary conditions occasioned by the war and arising out of the war creating a condition of scarcity hardly distinguishable, in effect, from a monopoly, thus giving to capital engaged in industry wholly abnormal and often extravagant profits.'' Mr. Chamberlain then made the fol- lowing significant reference to the proposed levy on war cap- ital. He said: "The qualification to which the increase is subject is this: The House is aware that a Select Com- mittee of this House is now inquiring into the practicability 20] BANKERS TRUST COMPANY ENGLISH PUBLIC FINANCE [21 of a levy on war increases of wealth. If, when they have completed their deliberations, Parliament should decide later on to impose such a levy, the fund thus available would relieve the pressure of the financial situation, enabling us to reverse the decision to increase the rate of Excess Profits Duty to 60%. I should therefore propose to submit to Parliament a bill later in the year to make a levy on increases of war wealth to cancel this increase in the rate of Excess Profits Duty and to collect Excess Profits Duty for the year at the existing rate of 40%. "The increased revenue to be derived from this source in the current year on the assumption that the rate is 60% will be only £10 million, raising the estimate of the total revenue from this source from £210 million to £220 million. More important than the additional £10 million actually received will be the further sums accruing but not collective during the present year amounting to £65 million next year and to a yet further sum of £25 million receivable thereafter. In other words, the addition to the tax will produce £100 million in all." The other proposed changes in taxation were unimportant compared with the one above referred to. They comprised increased rates on postage and for telegrams and possibly for telephone service, a new tax on motor vehicles instead of the existing taxation and heavy increases in taxation on spirits, wines, beer and cigars. Increased taxes on transfers of stocks are also proposed, while adjustments in the income tax are expected to result in a reduction by £18 million. A new cor- poration tax is also proposed. In concluding his speech, Mr. Chamberlain said: "These changes (in taxation) will produce in the full year £198,230,000, £9,500,000 to be drawn from the Post Office and £189 million derived as follows: — from direct taxation £125 million, from indirect taxation £64 million. For the current year they will give me a net addi- tional revenue of £76,650,000, making a total revenue for the current year of £1,418,300,000. At the close of the year we shall have outstanding assets of the following amounts: loans to the Dominions, £119,500,000, loans to allies and for relief, £1,767 million, or taking them as in former years at half that figure, £883,500,000; the remaining liability of India for five per cent, war loan, £21 million; vote of credit bonds of which a portion may still be required to meet extraordinary charges, £300 million; Excess Profits Duty payable after the close of the current fiscal year, £400 million. In all, assets of £1,724 million. "In addition there are reparation payments from our late enemies, the amount and times of which cannot yet be fixed. Whatever and whenever they are received they will afford an additional sum for the reduction of debt. Against expendi- ture, inclusive of sinking fund, of £1,184 million I provide a revenue of £1,418 million. This gives me approximately £234 million for the redemption of debt this year— a sinking fund equal to three per cent, of the total debt. Of this £234. million over £70 million would be available for the reduction of the floating debt. As the result of these changes there is every prospect that next year there will be available for the reduction of debt the sum of £300 million, of which one-half at any rate will be free for the floating debt. In the event of a normal year when temporary and extraordinary receipts and charges were both terminating and on the assumption that the Excess Profits Tax has also been brought to an end, there will be available for the sinking fund a balance of not less than £180 million. "I am content to say that after such a war as that in 22] BANKERS TRUST COMPANY which we have been engaged and after gigantic financial sacri- fices this is a position of unexampled and unequalled strain. It is true that to attain it we are obliged to impose fresh taxation and to call for further sacrifices. We may not bring popularity to the Government or to Ministers; but I am proud to say that we have sought in our budget to rise to the level of our great responsibility so that when we render up the seals of office we may leave to our successors an ample revenue and to our country a national credit second to none/' During the course of the debate which followed the presentation of the budget one of the members made the statement that two such budgets would destroy the Empire, to which Mr. Chamberlain replied, "I will not stop to retort that twenty such budgets would redeem the whole of our debt.'' Chapter IV The War Debt (1914-1920) TO return to the subject of the debt. The method pur- sued was, in the first instance, to secure advances from the Bank of England by book credits — called "Ways and Means Advances" — or to sell Treasury Bills. The sales of Treasury Bills have far exceeded the advances. They have been sold to mature at various periods ranging from three months to a year. At first the Government sold them di- rectly to the Bank of England, then it asked for tenders, then it put them on sale over the counter. When tenders were asked, the bidder stated the rates of interest he was willing to accept. As a rule it has apparently been found more satis- factory to oflFer the bills at a fixed rate of discount. This dis- count rate has varied with the market rates for money. The rates offered from time to time may be found by consulting the table printed on page 226. ii The First War Loans ' The second step in the process of debt financing was to make, at convenient intervals, issues of long dated bonds from the proceeds of which the Treasury Bills outstanding were reduced or retired, new issues being made again as funds were needed. It would be tedious to burden our pages with a detailed description of each series of bonds issued. The issues now out- standing will be found described in the National Debt State- ment to be found on page 208. However, it will be quite worth [23 24] BANKERS TRUST COMPANY ENGLISH PUBLIC FINANCE [25 f, li while and of interest to note how the more important loans were taken by the public. The first of these loans was for £350 million in three-and-a-half per cents. It was offered in November, 1914, at 95 and was quickly over-subscribed by nearly one hundred thousand applicants. The next loan was offered as four-and-a-half per cents at par in June and July, 191 5, and £570 million were taken by over five hundred and fifty thousand subscribers asking for an average of about £1,000 each, while 547,000 subscribers bid through the post offices for £15 million bonds, an average of £26 6s each. Then there was the Anglo-French 5% loan placed in the United States in October, 191 5, of which England's share was £51 million. T/ie Foreign Securities Mobilization Then came, in December, 1915, the scheme for the mobili- zation of the foreign investment holdings of the British people and their use to stabilize the American exchanges and to create credits in America against which purchases of munitions and other necessary supplies could be financed. The holders of such securities were asked to sell them or lend them to the Treasury for sale in America or for use as collateral behind issues of dollar bonds to be sold in the United States. The owners of the securities used as collateral received a certifi- cate entitling them to the interest which the loaned securi- ties yielded plus a payment at the rate of one-half per cent, per annum. The Government reserved the right of purchase, in which event the owner was to receive a fair market rate for his bonds or stocks. The response to this request was spontaneous and resulted by the end of 19 16 in the acquisi- tion by the Treasury of American stocks and bonds of a par value in sterling of £465 million, £118 million by purchase and £347 million on deposit. The entrance of the United States into the field in April, 1917 as an active participant in the conflict put an end to the necessity for further important financing of this kind. The result of the operation was to maintain New York exchange at practically a uniform rate of ^4.76^16 until March 21, 1919, when the control was removed. Similar operations were carried out for the stabilization of the Dutch and Scandinavian exchanges. For the entire period the total securities purchased amounted to £241 million, of which amount £46,600,000 were purchased by the Bank of England during 1915, prior to the inauguration of the mobili- zation scheme. The deposits on loan amounted to £414 million. The latter item included a special deposit of £8 mil- lion by the Canadian Pacific. Thus the total amount of securities dealt with was £655 million. The War Loans in igij In January and February, 1917, the 4% and 5% War Loan met with an enthusiastic reception, about £1,000 million being sold for cash. This time applicants through the Bank, numbering 1,089,000, took over £819 million bonds; about one million applicants through the post-office took nearly £31 million while it is estimated that over four million members of war savings clubs participated in purchases by such clubs of around £20 million bonds. Holders of about £131 million Treasury Bills exchanged them for these bonds. War Savings Associations The War Savings Clubs were one of the finest achieve- ments of the war finance. The general idea was adopted in our own country after we came into the war in the form of our W. S. S. with which we are all familiar. In England there % 26] BANKERS TRUST COMPANY ENGLISH PUBLIC FINANCE [27 were many group purchasers, neighborhood groups, servant groups, tradesmen groups and the like. Sometimes they pooled their purchases and offered prizes of various kinds. Then when a permanent war loan came out these groups used their organizations to promote the sales of bonds among their numbers. It is of interest to note that the National War Savings Committee was inaugurated by the British Treas- ury in February, 19 16, on the advice of a Committee presided over by Lord Montagu of Beaulieu. Its immediate functions were: (i) To educate the public as to the necessity for saving and for the reduction of unnecessary consumption by all classes, and (2) to provide facilities for the small investor to invest in State securities. War Savings Certificates were immediately issued, and the National Committee proceeded to set up "War Savings Asso- ciations**. Decentralization being found essential to the scheme, Local Savings Committees were organized through- out Great Britain, a democratic basis therefore being im- parted to the scheme from the outset. By the date of the armistice in November, 191 8, there were some eighteen hundred local committees, 14,000 official agents and branches, and 40,000 associations numbering not less than five million members. More than a quarter of a million War Savings Certificates had been sold, and the sum of nearly £201 million had been invested in the certificates by the public. From that date to January, 1920, nearly £95^^ million sterling had been subscribed in savings certificates. The average number of certificates sold monthly had been 9 mil- lion while the withdrawals were approximately only ten per cent, of the total issue. The amount outstanding on Janu- ary I, 1920, was £267 million. At a great gathering in London on January 15, 1920, Austen Chamberlain, the Chancellor of the Exchequer, stated that notwithstanding the success in popularizing the new forms of investment, the old forms had risen to higher figures than they ever attained before. He said that before the war, the deposits in the Post Office and the Trustee Savings Banks were something under £300 million while by the end of Octo- ber, 1919, they had risen to nearly £800 million. Sir Robert Kindersley, director of the Bank of England, to whom, as Chairman of the National Savings Committee, so much of the success of the whole movement is due, told at this same meeting how the army of voluntary workers for national savings enlisted by the Government from 19 16 onwards, had captured the imagination of the great mass of the people. He dwelt upon that innate "spirit of adventure" which has made the British Empire what it is to-day, and which prom- ised to make the movement as big a success in peace as in war time; and emphasized the fact that, out of nearly 400 million War Savings Certificates sold since the inauguration of the movement, 1 24 million had been disposed of since the armistice. As far back as the middle of 1917, the Commissioners of the British Treasury appointed a committee to consider facilities to be given to the small investor after the war and in view of the genuine success which the movement had achieved, this committee recommended the permanent continuance of the War Savings Certificate, having regard to the main fact that the habit of saving had been formed by "numerous persons of all classes who had not previously acquired it.'' In November, 1918, the Committee on Financial Facili- ties reported that it was enormously impressed by the great 28] BANKERS TRUST COMPANY ENGLISH PUBLIC FINANCE [29 increase in the number of small investors, and that the policy which had proved so successful during the war must be con- tinued at all costs. It was decided to extend the "life** of a certificate from five years to ten, and that it could be cashed at any time during that period. Particular attention has been paid, too, to the educational value of the moment. Largely owing to the good work of the educational authorities and of thousands of the teachers themselves, some 12,500 School Associations were set up dur- ing the war. In October, 1919, the Board of Education circularized all the local education authorities, urging upon them the continu- ance of the war savings movement in schools. To this appeal an absolutely unanimous affirmative was given, and the Na- tional Union of Teachers was requested to render support to the National Savings Committee. This the teachers are ac- cordingly doing with all the means at their disposal, and with absolutely unconquerable optimism. As Sir Robert Kindersley summed it up: ** First of all we had the impetus of the war, the desire on the part of everybody to try and help to win the war — that was the first advantage that we had. But we should have absolutely failed in this movement if we had simply set out as a pure collecting agency of money for the State. We had to have behind us a gospel. In fine, it was from the outset a gigantic eflFort in unselfishness on the part of an entire com- munity, which has seldom if ever been equalled in the history of humankind.'* National War Bonds — Continuous Offering In the latter part of 1917 and during 1918 and 1919 the Treasury tried the interesting experiment of abandoning spectacular periodical offerings and, instead, of putting on continuous sale over the country the National War Bonds. The idea was to feed the bonds out from day to day and thus to have a steady flow of money into the Treasury of, say, £25 million a day. The bonds were issued as fives subject to taxation, or as fours "income tax com- pounded." While the expected goal was not reached, yet the sales were very substantial. The amount of the issue outstanding at the close of 1919 was one and a half thousand million sterling. Victory Loan of i gig In June and July, 1919, the Treasury offered what was called the "Victory Loan" at 85, and in conjunction there- with the "Funding Loan" at 80. These loans bore 4% inter- est. Some £776 million bonds were sold. Summary The funded and unfunded debt as of December 31, 1919, when the debt had reached its maximum, was £8,078 million held by over 17,000,000 investors. This compared with a debt of £711 million on August i, 1914, held by about 345,000- investors. At the close of the fiscal year, March 31, 1920, the debt stood at £7,973 million, a beginning having at last been made toward its reduction. In the following table the debt is summarized according to dates of maturity. It will be noted that about one-fifth of the debt matures within one year and about another fifth within five years. 3ol BANKERS TRUST COMPANY ENGLISH PUBLIC FINANCE [31 NATIONAL DEBT Funded and Unfunded as of December 31, 1919 Per Million Cent of £ Total Total Due Within One Year: Ways and Means Advances .... 243,2 Treasury Bills 1,106,6 Exchequer Bonds 160,3 Anglo-French Loan 51,4 Victory Bonds 5,0 1,566,5 19- 39 Due Within One to Five Years Exchequer Bonds 146,4 Victory Bonds 20,1 Annuities 8,2 War Savings Certificates 267,3 Debt in United States 48,5 Debt Due to United States Govt . . 867,4 Other debt due to war — due Foreign Nations and to Dominions . . . 329»8 1,687,7 20.89 Due Within Five to Sixty Years: Exchequer Bonds 16,6 Victory Bonds 334»4 National War Bonds 1,508,8 War Loans 2,122,6 Debt in United States 60,0 Funding Loan 409,1 4,45ii5 55-11 Perpetual Annuities for life and term of years . 11,8 Consols 301,4 Debts due to Bank of England ... 11,0 Debts due to Bank of Ireland ... 2,6 326,8 4.04 Miscellaneous: Other Capital Liabilities 46,2 .57 Total 8,078,7 100.00 The outstanding Treasury Notes, amounting on Decem- ber 31, 1919, to £356 million, must not be overlooked in con* sideling the debt. However, as to the extent of £32,500,000 they are covered by gold and Bank of England notes and for the rest by Government interest-bearing securities which are presumably included in the debt statement, they probably need not be added to the above total of £8,078 million in order to determine the aggregate debt. Proposed Debt Reduction The British Government are fully alive to the necessity for reducing the debt as promptly as possible and particularly for making provision for the debt having early maturities. We have already noted in connection with the discussion of the budget for the current fiscal year that during this year the Government purpose to reduce the indebtedness by the sum of £234 million. The London Joint City & Midland Bank in their monthly review for April, 1920, estimate that possibly as much as £300 million may be available for debt reduction. On account of the importance of this matter we quote their remarks in full: "If expenditure and revenue for the current year fulfill budget estimates the surplus will be about 234 millions. Out of this surplus the Chancellor estimates that about 160 millions will be required for the Victory Loan Sinking Fund, for can- cellation of debt through revenue payments in scrip, for the Depreciation Fund on the 1917 War Loans and for provision to meet old debt (mainly external) maturing in 1920-1921. The balance of £74 millions is to be applied to reduction of floating debt. In arriving at this figure the Chancellor has apparently not taken into consideration repayments of 36^^ millions on account of Civil Contingencies due before Septem- ber 30, 1920, or the proceeds of sales of Savings Certificates during the financial year. We show in the appended state- ment that if receipts on account of Civil Contingencies and \ . 1. I 3^1 BANKERS TRUST COMPANY ENGLISH PUBLIC FINANCE [33 Savings Certificates are included, there may be a balance of lis millions available for the repayment of Treasury Bills and Ways and Means Advances, after making provision for the repayment of 25 millions of Exchequer Bonds in December next. ESTIMATED CHANGES IN DEBT, 1920-21 (000 omitted) Cr. Budget Surplus, 1920-21, on 1919-20 basis of taxation £157,548 Add estimated revenue in 1920-21 from new taxes 76,650 Civil Contingencies Fund — Repayments due before September 30, 1920 36,490 Sales of Savings Certifi- cates, based upon net proceeds 3 months to March 31, 1920 . , . 29,840 Dr. Victory Loan Sinking Fund £3,840 Cancellations through Death Duty Payments: Victory Loan . . 10,000 Other War Loans . 5,000 Cancellations through Excess Profits Duty payments 60,000 4% and 5% War Loan Depreciation Fund . 31,920 Repayment of Old Debt ♦(mainly external) . . 49,240 £160,000 5% Exchequer Bonds due Dec. i, 1920 . . 25,378 £185,378 Available for repayment of Treasury Bills and/or Ways and Means Advances . . 115,150 £300,528 £300,528 ♦Presumably the Anglo-French Loan. H. E. F. If the above estimates prove to be correct the amount of debt outstanding on March 31, 1921, will be about £7,565 millions/' Refunding Operations The Chancellor of the Exchequer announced on April 28th his intention to place on sale, as of May 3d, a new series of Treasury Bonds with the avowed object of reducing the float- ing debt of early maturity. The amount of bonds to be issued is unlimited and they will be on sale at the Bank of England until further notice. The principal and interest of the bonds are chargeable on the Consolidated Fund. The bonds will be repayable on the first of May, 1935, or on the first of May in any one of the years 1925 to 1934, inclusive, at the option of the Government or of holders of the bonds, on notice having been given by the Treasury or the holders during the month of April in the year preceding that in which such repayment is to take place. A novel plan is proposed in regard to payment of interest. We quote from the official circular: "The bonds will carry interest at the rate of 5 per cent, per annum payable half-yearly on the ist May and ist No- vember and subject to the conditions stated below, will carry additional interest payable during the period ending ist May, 1925, as follows: If and when during any half-year ended ist May or ist November, the Treasury Bills issued to the Public were sold to them at an average rate of discount (as certified by the bank of England) exceeding 5J^% and under 6>^% per annum, additional interest will be payable on the interest date next succeeding such ist May or ist November at the rate of 1% per annum. If and when such average rate of discount was 6>^% per annum or over additional interest will be pay- able at the rate of 2% per annum. "The first interest payment, payable ist November, 1920, will represent in the case of each bond interest to that date if: ■Imfl 'fii ITT'? 34] BANKERS TRUST COMPANY from the date on which the application was lodged and pay- ment made for the bond, and will include additional interest at the rate of 2 per cent, per annum. An announcement will be published in the London Gazette on or about the 2nd November, 1920, and thereafter half- yearly until the 2nd November, 1924, of the rate at which Additional Interest (if any) will be payable on the next suc- ceeding interest date." In the opinion of the Chancellor, the novel feature in re- gard to the payment of interest will probably protect holders against depreciation in market values when short-term money rates are high and also prevent the new issue of bonds from causing further depreciation of market values of the older issues. The maximum possible average yield from the new bonds if held until 1935 would be £5 17s 4d per cent. At the time of issue 3>^% War Loan was selling to yield £7 3 s yd per cent.; 4^% War Loan £6 7s 6d per cent, and 5% War Loan, £6 5s id per cent., therefore the success of the new issue was considered problematical. However, the Govern- ment is so fully alive to the importance of liquidating or funding the floating debt and the debt of early maturity that any modification of present plans necessary to insure this result may confidently be expected. Credits to Debt Account The debt on March 31st, 1920, of about £7,973 million was offset by advances of £1,851 million; say to the Domin- ions of £120 million and to allied governments of £1,731 million. The following itemized statement is taken from the finan- ENGLISH PUBLIC FINANCE [35 cial statement already referred to laid before the House upon the opening of the budget: LOANS TO DOMINIONS AND ALLIES March 31, 1920 (00,000 omitted) Obligations of Dominions: Australia £5i»6 New Zealand 29,6 Canada • I9i4 South Africa 15,8 Other Dominions and Colonies 3,1 £119,5 Obligations of Allies: Russia £568,0 France 5i4»8 Italy 455»5 Belgium (a) War 92,0 (b) Reconstruction 5,3 Serbia 20,9 Portugal, Roumania, Greece and other Allies. 66,6 Relief Loans 8,0 £1,7^1,1 £1,850,6 Further advances of £36,000,000 provided for in the esti- mates 1920-21, will raise this total by March 31st, 1921, to approximately £1,886 million. Mr. Chamberlain in his budget speech estimated the advances to the allies as probably realizable at about fifty per cent, of their face value. This would afford an offset of about £1,000 million against the gross debt. ^m^mm mim Mi It I ill iiii mil ■■u i II fH n 36] BANKERS TRUST COMPANY It IS understood that no interest has been charged on the pre-armistice debt of Belgium, Serbia and Montenegro. It is understood that in the case of Belgium, the French, Ameri- can and British Governments have agreed to accept German bonds for the amount of Belgian indebtedness. In other cases interest is calculated either at 5 per cent, or at Bank rate and is added to the principal of the loans outstanding, so that no payments of interest on pre-armistice debt have been received by the Exchequer except in respect of a single trans- action where special arrangements were made. Negotiations as to the future treatment of the debts of the allied and associated governments are proceeding and the Government have expressed their willingness to extend to their debtors similar treatment to that which may be arranged in respect of their own debt. TAe Comparative Burden of the Debt Assuming, then, about £1,000 million to be realizable from debtor nations and the Dominions the net indebted- ness of the nation on March 31, 1920, may be placed at £7,000 million as against national wealth estimated at per- haps £24,000 million; a ratio of about 30% net debt to national wealth. The debt charge of, say, £360 million compares with estimated national income of about £3,600 million. Therefore the debt of to-day bears about the same relation to wealth that the debt at the close of the Napoleonic wars bore to the estimated wealth at that time. The interest charge now, at 10% of the income, compares with 8% in 1817. In the table printed on the opposite page further interest- ing comparisons are made with conditions at the conclusion of the Boer War and on August i, 1914, just before the recent war began. fe Q O H PQ O w Q M pL, § d o o (A z o u 0) o u 00 O ro o O o o o o ""t r*i ro \f> ^ t^ OV l^ o »-t 0.(3 o o ■* "t rf M 00 0\ . a ro rf O M 0\ Ov Ov M Ov M CO a bo o :^ < Q .rt a a O to o O PQ a u o a o, a u di a a -a )-) 3 U 0) a O bO Otrj 03 eg S*^ CO 3 O CO U 00 O. ^ CO ^ CO u O ■!-» 0.5 o. Ma c a •^ is O Co •♦-» *^ U O -^ ci mS a a ••J a o u s 00 a CO O a 3 a .0 2 S a •5 CO 0) bO n a o a > bfl d O 00 C44 bo J3 00 O O B 00 ^ • •2-g CO X HJ3 38] BANKERS TRUST COMPANY ill The great progress in the past century in science and in its application to the arts enabled Great Britain to expand her business and increase her capital at such a rate as to steadily reduce the burden of the debt in comparison with national income and resources. It is impossible now to determine just what the future may have in store to mitigate the present day burden. The won- derful developments in air navigation during the war and the great importance which the chemical industries assumed dur- ing that period may afford a hint of surprises in store which will assist in lightening to-day's burden. Potent factors in assisting Great Britain to create new assets to balance her war liabiHties will be the closer knitting together of the Empire, the further colonial development in Mesopotamia and in Africa, and redoubled efforts to extend her commerce, especially in Russia and the Far East. Lessons in efficiency taught by the war and a larger use of machinery, doubtless will also play an important part in the developments of the future. Chapter V How the Banks Helped Finance the War (1914-1920) FOR the benefit of those who are not familiar with banking operations in England and the United States it may be explained that, as a usual thing, every loan made by a bank results in an increase in the deposits of the bank or of some other bank. If a merchant or manufacturer or other business man borrows at his bank he usually has the amount of the loan credited to his account. The result is that an increase in bank loans is nearly always accompanied by an increase in bank deposits. Therefore, an increase in the deposits of a bank is not necessarily, as is often thought, an index of the increasing wealth of a community but often merely of in- creasing business activity, or simply of credit expansion. If the increase in loans and consequent increase in deposits is brought about by unproductive borrowing, this gain in de- posits may be a sign of financial weakness rather than an indication of growing wealth. The war financing in England and in America was effected by the use on a large scale of this familiar process of every- day banking. Each loan issued by the nation increased the loans as well as the deposits of the banks. This was due in large part to the fact that in many instances the purchasers of government obligations borrowed from their banks in order to obtain the funds with which to pay the Government. These loans created deposits against which cheques were drawn to the order of the Government — that is, in England, to the order of the Bank of England. The actual payment [39 I 4ol BANKERS TRUST COMPANY ENGLISH PUBLIC FINANCE [41 if" i Hi I ¥\m m Sill might have been to the order of one of the joint-stock banks, but ultimately the money would reach the Exchequer through the Bank of England. The Government would then draw upon this deposit tb pay its expenses for munitions, for food and clothing for the enlisted men and for the hundred and one other needs of a nation in a time of war. Bank Reserves vs. Credits The extent to which a bank can extend credits to its cus- tomers is determined by its reserves, in England often called cash balances. As a result of long experience bankers have found that on the average only a certain percentage of their deposits is drawn upon; the balance remains more or less as a fixed deposit. This balance can be safely loaned to the business community, but a reserve in the form of actual money or its equivalent must always be held, out of which the cheques of depositors can be promptly met. Such a fund is a prime essential of solvency. In England the banks have established the custom instead of holding all of this reserve in actual money, of keeping the greater part in the form of a deposit with the Bank of England. In the United States the member banks of the Federal Reserve Sys- tem, which comprise all of the National Banks and most of the large State banks, are required to carry their legal reserve with the Federal Reserve Banks. The experience of banks as to the amount of reserve which must be held varies with their location, the nature of the business done by their clients, the season of the year and other conditions. In general, it is found that for commercial banks (other than central banks of issue) a reserve of from ten to twenty per cent, of deposits is ample in normal times. That is, if the English banks have on hand in gold, Bank of England notes, and/or deposits with the Bank of England, say, £100 million, they can safely maintain their credits— that is, their deposits, which result chiefly from loans, at from £500 to £1,000 million. How the Government War Loans Were Financed If this point has been made clear we are now in a position to understand how banking methods were applied to the war financing. In the case of the large loans, it was customary to divide the payments into several installments spread over a period of weeks. The reason for this arrangement will be apparent when the process of settlement is considered. The amount which the banks could conveniently handle in one payment was determined by their reserve which con- sisted chiefly of their deposits with the Bank of England. The process of payment was likened by the late Chairman of the London Joint City and Midland Bank, Sir Edward H. Holden, to the revolutions of a wheel. "The banks place in the wheel the payments they make for those customers who have subscribed for the loans; the wheel carries these payments to the credit of the Government with the Bank of England, and the subscribers receive their securities; the Government then places in the wheel cheques, in payment of commodities received and services rendered, for conveyance to their creditors, and the creditors then use the wheel to carry these cheques to the credit of their ac- counts with their banks, which re-establishes the banks' re- serves and prepares them for another installment." In the case of Treasury bills, and other securities sold from week to week in relatively small amounts, the revolution of the wheel was rapid enough to keep pace with the new borrowing, but in the case of the large loans it was found advisable to break up 42] BANKERS TRUST COMPANY ENGLISH PUBLIC FINANCE l43 i the payments into installments, so that each installment might have time to get through the Bank of England, through the business firms and back into the banks before another in- stallment was required. One method by which the banks developed an ability to finance the stupendous needs of the Government was through a utilization of the credit facilities of the Bank of England. To increase their clients' ability and their own ability to invest in Government issues they would borrow of the Bank of England. These loans would increase their deposits with the Bank of England which as reserves would increase their ability to grant to their own clients loans equivalent to, say, five times such deposits. Ways and Means Advances Another and most important way in which the banks were used to finance the war was through the creation of direct credits by the Bank of England in favor of the Government. These credits are known as "Ways and Means'' advances. How the Government benefited by these advances and how they operated to create credits with other banks we will allow Lord CunlifFe's "Committee on Currency and Foreign Ex- changes after the War" to tell us. In their final report laid before Parliament in December, 1919, the Comnfiittee draw attention "to the extensive use made during the war of the system of ways and means ad- vances from the Bank of England" and then go on to say: "The powers given to the Government by Parliament to bor- row from the Bank of England in the form of an overdraft on the credit of Ways and Means were, as the name implies, in- tended to enable the Government to anticipate receipts from revenue or permanent borrowings for a brief period only. In- deed, Parliament, by expressly providing that all such ad- vances should be repaid in the quarter following that in which they were obtained, showed that it had no intention of bestowing upon the Government the power of securing an overdraft of indefinite duration and amount. Under the exi- gencies of war finance the Government found it necessary to reborrow in each quarter on the credit of Ways and Means the amount needed to enable them to comply with the statutory requirement that the previous quarter's Ways and Means Advances should be repaid, with the result that the total out- standing advances remained for a long time at a high figure. We are glad to see that efforts are now being made to reduce this overdraft to more moderate dimensions. "We therefore hope, now that conditions are less abnormal, that the Government will confine its use of Ways and Means Advances from the Bank of England to providing for purely temporary necessities. Such advances afford a legitimate method of tiding over a few weeks' shortage, but are entirely unsuitable for borrowings over a longer period." In their interim report, submitted in August, 191 8, the Committee explain how these advances operated to swell bank deposits and loans: "This process has had results of such far-reaching importance that it may be useful to set out in detail the manner in which it operates. Suppose, for ex- ample, that in a given week the Government require £10,- 000,000 over and above the receipts from taxation and loans from the public. They apply for an advance from the Bank of England, which by a book entry places the amount re- quired to the credit of Public Deposits in the same way as any other banker credits the account of a customer when he grants him temporary accommodation. The amount is then paid out to contractors and other Government creditors, and » Hlllir: JS^m 44l BANKERS TRUST COMPANY * passes, when the cheques are cleared, to the credit of their bankers in the books of the Bank of England— in other words, is transferred from "Public'' to "Other'' deposits, the effect of the whole transaction thus being to increase by £10,000,000 the purchasing power in the hands of the public in the form of deposits in the joint-stock banks and the bankers' cash at the Bank of England by the same amount. The bankers' liabili- ties to depositors having thus increased by £10,000,000 and their cash reserves by an equal amount, their proportion of cash to liabilities (which was normally before the war some- thing under 20 per cent.) is improved, with the result that they are in a position to make advances to their customers to an amount equal to four or five times the sum added to their cash reserves, or, in the absence of demand for such accommo- dation, to increase their investments by the difference be- tween the cash received and the proportion they require to hold against the increase of their deposit liabilities. Since the outbreak of war it is the second procedure which has in the main been followed, the surplus cash having been used to subscribe for Treasury Bills and other Government securities. The money so subscribed has again been spent by the Gov- ernment and returned in the manner above described to the bankers' cash balances, the process being repeated again and again, until each £10,000,000 originally advanced by the Bank of England has created new deposits representing new purchasing power to several times that amount." How this process actually worked out is described in the next chapter. Chapter VI The War Credit Structure (1914-1920) THE Credit Structure tables to which the attention of the reader is now called are based upon the pub- lished returns of the Government and of the banks made nearest to the end of the calendar years 1913 to 1919 inclusive. The purpose is to compare the total liabilities of the nation on account of the debt with the assets of the banks and to compare the currency and the bank deposits with the gold coin and bullion impounded in the coffers of the joint-stock banks and of the Bank of England. The statistical data used are taken from the weekly reports of the Bank of England, from the Cunliffe Committee's reports, from a paper on the Statistical Aspects of Inflation, by Professor J. Shield Nichol- son, read before the Royal Statistical Society in June, 1917, from the Banker s Magazine (London) and from the columns of The Economist and of The Statist. The National Debt and Bank Assets Table I compares the year to year changes in the national debt with the corresponding changes in bank assets. It is somewhat of a surprise that the Bank of England's holdings of Government securities do not more fully reflect the changes in the Ways and Means advances. However, taking the entire debt fluctuations into consideration it is apparent that the assets of the banks have fluctuated with the changes in the debt, and that bank assets have grown as the national debt has grown. It is not possible to make close comparisons be- cause call loans are reported together with cash in hand and [45 IH m ii ' 46 1 o o m B am* o, o & a 8 M •■2 I S o a 1 •2 |5 OS > I en n H o O O PQW n Q Jz; o BANKERS TRUST COMPANY CA CO Q o cd< S to A^ i-< »*T ^ '^ 2 b >» ^ 3 0) ^Ji I 5 •co^ S3 £4 PQ OB OB 5^ IDOO 00 Tj- C< 00 t^oo t^ to r^ ►"! 10 vo 10 0< 00 00 ++ O "^00 i-i 00 t>* «h •« M «k «^ «k fOOO C^ M On *-• 00 H-i VO NO r^ 10 VO •-<•-• + I+++ O 0* ++ O fO t^vO On ro M rfvO r^ tOvO On CO OM-i M »0 +++++ 00 ON H4 00 H 00 (\i CO N ++ vO O «-• t^ 1000 •« «i^ •« •» th «^ rOvO Ov CO fO CO On "^ M r>^00 + I + + + 10 0> c\j t-oo CO H VO •^ *-' C Ov"^ 3 _ "^ M O cd O ^ cj tf "5 ^ S c . O^O O vp ^ > O lO O + ++ CO rHOo ++ 00 10 CO tx cOOv vO CO Tf HH Ov t-" •b a^ a^ •« «h •» Tfco O »00 CO CS t^ Tf »^ t^ ON t^ W >H Tf O 00 •fc •« *k •» M M O M +++++ On M CO tx CO Ov ++ 00 t^ «H ++ QOO VO t^ VO O + VO OvOO lOiO Th A ^ •« 4^ Mk C^ i-K On •-• CO "^ On O 00 00 (N< On r^ t>. r>»vo OnvO + + + + + CO o 00 tTs + + VO 00 10 iH CO ++ Cl On CO O (O + + M 00 VO CI 00 t^ + 10 ON H4 VO '^ Tf •k 0^ «k •» «k «^ ^vo Tj-ooo r^ M Tf CO On C< CO COVO + + +I + 8^ «0 "^ O CO o »^ + + 10 O 10 O 00 CO •k «^ ffh •« Vk flh 00 t^ Ti-i-i t^vO CO M O O t^ +++++ to CO H CO ^ ++ On CS t* H •• •• •> ■ "-• CO ^ »^ •-' "*!*• eoK:» M CM cq Is. I + + CO rMOvO 1^00 H^ H4 l-l M H4 M On On On ^ ON ^ a as a o 03 PQ 03 03 43 08 U ENGLISH PUBLIC FINANCE [47 at the Bank of England. It is probable that some of the banks treat Treasury bills as equivalent to cash, while others treat them as investments or as discounted paper. It is interesting to note that most of the debt of the Government must be held outside of the banks as the entire increase in the assets of the banks, outside of plant, from the close of 1913 to the close of 1919 amounting to around £1,200 million was only about one sixth the increase of the debt. If then we make the unlikely assumption that the entire increase in the assets of the banks is represented by holdings of National debt or loans thereon it is evident that over £6,000 million of debt has found permanent lodgment with private and cor- porate investors other than the banks, and that they are not borrowing against such holdings. The probability is that a much larger amount is so held as the increased assets of the banks must represent, in addition to Government obli- gations, large increased holdings of business paper. Note and Deposit Currency vs. the Gold Reserves Tables II and III permit of a year to year study of the growth of the note and deposit liabilities of the banks, which may be said to represent the credit facilities of the nation, and a comparison of this credit structure with the specie reserves. The interesting conclusion at which we arrive is that in the case of the Treasury Notes, Bank of England Notes in circulation and bank deposits, the percentage of reserve in each instance has fallen. This is especially noticeable in con- nection with deposits where the estimated effective gold reserve held against all deposits on December 31st, 1919, was only 2.3 per cent. While the entire credit structure increased from £1,227 million in December, 1913, to £3,002 million in Decern- 1(1 mi llll Kill !■■■" - II M I 48] BANKERS TRUST COMPANY Pi £ I- < ••a CO 00 W.2 u CO M 2 ►So M 00 o M On M 0\ W5 M M u o o o H I o (V| CI O «0 ^ O H "O Xi >0 H «V) »0 M «M 00 ts. M r^ t^ 10 0000 o O N fO Oj vO to N 10 •00 00 UN 00 M On •k * •> 00 »o 10 Ov !>. CI fO 00 ■k M "^00 00 On m On r^ t^QO CI "^ O 10 On Ch ro 00 o 00 10 w cT o. fO N M t^ On M CO O On C|\0 >0 1^ M 00 a 00 m H o 100 rf ci" q "^ 1000 10 fO "^i> q t^ On M 00 M On O M CI O fO Tj- t>. ! N N H H 00 CM CN| H q "^ Oo c5I oo M ^«N| q ^^ VO ex C^nO ol o" H 00 00 t^ fO Tj-t^ O fO ci" t^ 00 CI M i* cT q ^ r^ q 00 fO rtrn o o •I CO rooo N c< TtMVO fO •k » ak «k ro CI M M 00 N ro»o 10 N M 00 00 On CI cToo 00 lO »o o. On N CO CI CI* CO 10 CM 9. t cToo ro»o P0»O ro t^ »OnO On rf vO a On -"t COM 00 o CI "O 00 M N c"nO t^ On M 00 0) N 1 t rovo' 10 On NO Tt NO ro O »OvO 00 CO M M i qoo o q rOj^ vO ro H\0 10 o 00 t>- On On m M M ^^ t^ q cT o t^ cT On ^l^ ro On m 00 ro CI Tt»0 rfO M Tt o 10 10 q q 000 CI CI On to >q »o*^ q »0 CI rf cT On ro t^ CO 00 M 10 10 ro H •k o H 00 M roON M CI 10 ro M ■k •■ O M M vO M ^q t^ M d»o d t^ O CI t^ CI 00 M CO ro O 10 fN| 4 2o r»io o M M 00 00 d o iS^ a, O ^fis w d 2 « 0.0Q O m d 5j3 H O CO 01 s ^ en d o 1- li 4-» CO 0*3 o H >-• flj loo CO O O ^ C.CL 4; P H O H O D H W H U ^ gS "S o ^ d -5 .5 So ^go rt d 2 hS O- o 00 >0 01 C| o rvi 0) ""•^^ 00 T3 ^ o d p j^bo .s!Sw . ^ o o so as o 0*0^ G M V o Ofl a> c d^ c/}H o-s •^•2 d+j -^ d d"-« C2 O (l;.S o o a> 09 o i^ a M d iS-g rt onw H ™ O *J >-' d^ 2 =3 w 'Oxi o S M o«dI^«« o-oSg^ »-< ••^ ..-I O cj ♦j'*^ O d 5 3 * o 5 2jq ^ o CO 09*" +J " m O ^ CS = ENGLISH PUBLIC FINANCE [49 ber, 1919, an increase of 144.7 per cent., the specie reserves held increased only from £85 million to £160 million, a de- crease from 6.9 per cent, of the liabilities to 5.3 per cent. It is evident that in the diminishing gold reserve and the increasing liabilities, we have a serious situation. Hig/i Prices and Bank Credits Present high prices are easily explainable when it is con- sidered that the actual volume of commodities required to support the people of Great Britain is probably no more to- day, and possibly is less, than it was before the war. It is doubtful, too, whether the physical volume of trade has increased during the war period. Estimates made for the United States by Professor E. W. Kemmerer of Princeton University show that the physical volume of trade for our country increased from 1913 to 1919 only 9.6 per cent. There is no similar computation available for England, but Pro- fessor Kemmerer believes it to be unlikely that the actual in- crease there in the physical volume of trade during the same years has been as great as in the United States. He thinks that it has been less. If this is true, then it is easy to un- derstand why prices have advanced in the marked manner shown by The Economist Index Number of commodity prices printed below. If the adjustment between the currency and the credit structure and the physical volume of trade is properly made the normal variation in the rise and fall of general prices will not be great. There will be seasonal de- clines when new crops come in and advances as the bins become empty, but, as a rule, there will be no marked devia- tion from a general average. But if the credit structure is dislocated or if there is an unusual harvest or an unusual demand such as is caused by I ^'^ ■•■"*■■*• '^ 4 m ft so] n U r O' H 6 o OS B u 8 BO eo C CO I o CO BANKERS TRUST COMPANY 09 ^ U o c o6 .00 • I o I 2 Qo ^f 00 00 o •^ I • • I M a lo q 00 "^ pi PO "^ O M 00 O f^^odoo to Tj- N O rj- frj 00 Os OOO M POOO o M >«, O ro q uj 00 N 00 "^ lA 00 M 0\ m m 00 00 M po "^ o lo q t^OO t-i w « M «vO N ►"! 00 OOO P^ q «>« lo S "nod 00 '^ M 00 in 00 q q»N.>q «i2 00 wi ^OC 00 IO»>« (V| M M O M O O N. » • * » • M >o O w ***. PO N ^t^ M oq a««^od (0 o M 1^ 00 00 CM »0*v P^ M M PC do po> PO "^ "Vt^ pocxq PON-liJ 4»*^00 00 <^ 00 00 l/> NS POVO «>vt^ » • * • • » » 00 1^ M P^W^M C M «M 1 ITi •n O 0> •-< lOM » • *••»•• 00 00 OtOO HOOOO M ^ NO IS.O. vo ^^o^o <*^ •^H O Tf>^ ^•^ q MNO o"" to M Tf M c* 00 >^ooo i-i M PT) O M ts. »0«^^0v "^t^q a>d o* » • » 0^.00 O M iCd PO M o a> § « Q <«« o .o < 9 O Z eg P0^^>^O ^ 00 f^OOO Ok « ^>po»n a>o o » • » "t^hO CO Prj W) Ok^ 00 0) c> 5" 00 a; I a ti a •a n c O ■§1111 O .--^W "►^ 8 O ^ ti*' I c •s'M*^ 00 aU K c CO V I » I Cd M . 00 .£(§gg •X3 IS . Q IS CO < o^ c a; iS 00 s o i« ' 4) m in ^ o •o u rt a C V o _^v O-tJ C^TS • - C« eo ►"• .t: o y rt o etf ^ 2 ^ rt .£ « *^«SdCS. .S^ o «^^-fl nj^ boa> d S d2*£*fi ^ a> SR o (tf o'^ p 09 ^ jj o a s «> •Oltt MS S M g — •tf t* o •*' § 2 . .= It *» w a;T3 ♦!* *^ bo a ^ 9 d « O-O Si ^»•« ENGLISH PUBLIC FINANCE [51 war then the price level will reflect these conditions. Let US see what happened between 1913 and 1920. Taking the price index of December 31, 1913, as 100 we find that in 1915 prices rose 38 per cent, above the base. During the height of the war, in 1916, 1917 and 1918, they averaged oyer twice the base price, but with the war over they kept soaring and by the close of 1919 they were nearly three times the pre- war prices. Here are the figures : ECONOMIST PRICE INDEX Increase Increase per cent. Index No. over 19 1 3 over 1913 . 2623 Base 100. . 2800 177 106.7 • 3634 lOII 138.5 . 4908 2285 187. 1 . 5845 3222 222.8 . 6094 3471 232.3 . 7364 4741 280.7 Dec. 31 1913 1914 1915 1916 1917 1918 1919 As one measure of inflation we may profitably study the comparative volumes of imported goods and their values at the custom house. There is no common denominator of quantities. Some things are measured by tons, others by pounds and others still by numbers. Although we cannot add together all of the commodities imported and largely consumed at home, we can select certain of the more impor- tant commodities and take their testimony. This we have done in the following table. IP 52] BANKERS TRUST COMPANY ENGLISH PUBLIC FINANCE [S3 3) ilK ONE EVIDENCE OF INFLATION Quantities and Values of Imports Compared (In millions) Calendar Year Wheat, cwts.. Beef, cwts . . Sugar, lbs. . Tea, lbs. . . Cotton, cwts Wool, lbs. . . 19 13 Quanti- ties 105 9 39 365 22 800 Value £44 16 23 14 70 34 1918 Quanti- ties 58 7 26 463 15 413 Value £53 36 34 29 150 36 1919 Quanti- ties 71 6 32 510 19 1,042 Value £68 30 54 34 190 97 Thus we see that the quantities of wheat, beef, sugar, cotton and wool imported in 191 8 were materially less than the quantities imported in 1913 and yet the money values were greatly higher. While in 1918 and 1919 the imports of tea, and in 1919 the imports of both tea and wool, exceeded in quantity the imports of 1913, yet in every case the relative money values of the imports is materially greater than the values of 1913. Could there be a better illustration of the manner in which a disproportionate increase in the credit structure leads to increases in prices.? The imperative need for a firm handling of the credit situation is apparent. Not only in England, but in all other countries, the world over, must there be practised drastic economies in government expenditures and every effort put forth to meet expenses from taxation. Government borrow- ing, except for refunding purposes, should cease. At the same time the people must settle down to productive work. Meanwhile it is the obvious duty of the banks to hold speculation in check and gently but firmly to reverse the process of inflation which the war made necessary. The tables bring out in bold relief the manner in which * bank credits were used to win the war. They also show the dizzy heights from which the business of the world must cautiously descend, before normal conditions nationally or internationally can be resumed. We may now profitably retrace our steps and consider the history of English public finance from its genesis in Norman days. iiii V — ENGLISH PUBLIC FINANCE [55 ' ili ■ rr Chapter VII Crown Finance (1066-1688) n^HE foundations of England's present-day financial struc- -■- ture were laid broad and deep centuries ago. The Exchequer and the Treasury can trace their lineage directly to Norman times, possibly even to the times of the great Alfred himself. There have been a Chancellor of the Ex- chequer and a Treasurer since the days of Henry II— that is, since the middle of the twelfth century. Books of account, or rather Rolls of account (for the ac- counts were written on parchment which was made up in long strips which were rolled up when not in use) are extant from the reign of this king. The early kings had extensive demesnes from which they derived a large part of their revenue. Aside from this source of income, the receipts of the Exchequer during all of these ages have come from three principal sources— from internal taxation, from customs and from borrowing. The history of the revenues of England's kings is insepa- rably bound up with the history of the development of her civil rights. The fight for the control of the purse, first formulated in the terms of Magna Charta, wrung by the barons from the tyrant John in 121 5, was only won after four and a half centuries of conflict between sovereign and people. The word "people" is used here and elsewhere in these chapters as a generic term referring to those members of the body poHtic who from time to time were capable of taking part in public affairs. In the time of the Norman Kincs 541 ^ probably not over a fifth of the inhabitants could be so classified. The growth of general intelligence which has at last, in a sense, fitted the greater part of the people to exercise the rights and duties of citizenship only came into full flower within the past century. The effort on the part of the sovereign was to secure an income from other sources than from taxation. The people, on the other hand, found that the only way to insure just treatment by the sovereign was to keep him poor, so that he needs must come to them for an "aid" or a "grant." On such occasions they could insist on a^redress of grievances or on a surrender of some part of the royal prerogative before the grant was voted. Thus, little by little, one by one, were secured the liberties which old England and ourselves now enjoy. "No taxation without representation" was not a new formula in 1776. The principle had its beginnings centuries before. . , t, , We are to study English public finance smce the Revolu- tion of 1688, but in order that we may do so intelligently, we must first consider the developments of the six centuries which elapsed between the advent of William the Conqueror in 1066 and of that other William who came over from Holland in 1688, at the request of a little band of patriots, to help them rear a constitutional government on the founda- tion which had been laid by their forefathers and upon which the Stuart Kings had tried in vain to build for autocracy. This later William had expected to receive the usual life grant from the customs which the kings and queens from time immemorial had enjoyed. The Commons declined to make this grant for a longer period than four years. Thence- forward the power of the King steadily declined and the rights of the people steadily increased until we have in the \i ii i 56] BANKERS TRUST COMPANY England of to-day one of the greatest democracies of the world and of any time; a democracy the government of which IS more sensitive, perhaps, to the will of the people than is the case even in our own United States. Let us now turn our attention to the eleventh century and trace the course of public finance to our own day. We will be able to deal only with the facts of greatest importance. Chapter VIII Revenues of the Anglo-Saxon Kings WHEN William the Conqueror arrived from Normandy, what revenue system did he find and what new ideas did he bring with him from his Norman home? T/ie King's Demesne First of all he found that Alfred, and Edward (called "the Confessor") and his son Harold had enjoyed great landed possessions, and flocks and herds. They had possessed rude castles, jewels and richly embroidered robes of state. They had had a royal hoard kept in the King's castle where there were leather bags filled with the roughly minted silver coins of the time. The germ of the feudal system was there also. Trinoda Necessitas The revenues of the Anglo-Saxon kings were derived from their estates, from fines imposed as penalties for the infraction of the rude laws of the times, and from certain taxes to which every land owner was subject. These taxes, known as the trinoda necessitas ^ were at first exacted in kind; every free- man when legally called upon was obliged to appear in person for the purpose of repelling the enemy, here-geld; or when a city, town or castle or a fortress for the public defense was to be built or repaired, burg-hote; or when bridges necessary for the internal commerce of the country were to be built or repaired, brig-bote. In time it came about as a matter of convenience that for payments in personal services or mate- rials a money equivalent was given. [57 II i 581 ill '!(! ill BANKERS TRUST COMPANY ENGLISH PUBLIC FINANCE [59 Dane-geld These taxes, intended to meet the ordinary contingencies of day-to-day life, did not suffice to repel the attacks of the Danes. These were not infrequent, and were marked with every species of devastation and horror. Therefore, in the latter part of the tenth century it became the custom to bribe the Danes to stay in their own country. As usually happens in cases of bribery and blackmail, the Danes continually de- manded renewed and larger payments. The tax which was laid to obtain this money was known as Dane-geld, or Dane- money, and was raised by a levy upon lands. Ultimately this tax became a regular source of income to the Crown. Laid ostensibly for the defense of the country against the Danes, actually it was used for any purpose to which it might be applied by the King. This tax was very odious to the people, but persisted, except during the reign of Edward and Harold, until long after the Norman Conquest. It is the first instance in British history of a tax laid upon lands. It was imposed at so much a hide, a measure which may be roughly taken to have been about one hundred acres. Other Anglo-Saxon taxes which endured to later times were the hearth tax, a payment to the King for every hearth in all homes, except those of the very poor, and ship-geld, money raised to build and equip a ship or ships for use in repelling invasion. This latter tax was levied, as a rule, only on the coast towns. Purveyance Under a system known as purveyance, it was customary for the reeves, or sheriffs, to make a levy of goods to be used for the maintenance of the royal household. The King was entitled also to a share of the produce of the folk land — that is, land held in common by the residents of different neigh- borhoods. Customs Probably the Anglo-Saxon kings had some revenue from home and foreign trade. We find smiths and carpenters, fishermen and millers, weavers and architects mentioned in old chronicles as belonging to various convents. We also find the merchant asserting the dignity of his calling. "I am useful," he says, "to the King and his nobles, to rich men and to common folk. I enter my ship with my merchandise, and sail across the seas and sell my wares, and buy dear things which are not produced in this land, and bring them with great danger for your good." And then he tells what he brings — "skin, wine, oil, costly gems and gold, various garments, pigments, brass, copper, tin, glass," and so on. This whole question of foreign commerce from these early days until now is of intense interest, and is as much bound up in the story of England's business life as the question of pub- lic finance is inseparable from a study of the development of England's liberties. Licenses In Anglo-Saxon and Anglo-Norman times, fairs took the place of shops. In the beginning they had a distinctively religious character which they gradually lost. The people were in the habit of coming together to perform their devo- tions in the churches at night-time with candles burning. They would gather in the church porches and yards for social intercourse, and finally "fell to lechery and songs, dancing, harping, piping and also to gluttony and sin." Thus was laid Hi l« mm 6o] BANKERS TRUST COMPANY the foundation for those periodical fairs which are held even to the present day. It was natural that where the people were gathered together the merchants should bring their wares for sale. This was also a great convenience to the people when the means of traveling were bad, and opportuni- ties to supply their needs were scant. At these fairs they could barter their sheepskins and agricultural produce, or any of their rough local manufactures, for the wares of the mer- chants. In time these fairs became markets which were held at regular places at regular intervals, probably very much as is still the custom in Russia where the annual fairs play such an important part in the commercial life of the people. It need scarcely be pointed out that the thrifty Anglo-Saxon and Anglo-Norman kings turned this custom to good ac- count as a means of revenue, charging fines, or, as we would say, license fees, for the right to hold the fairs. The Exchequer There was in use, too, in all probability, a system for col- lecting and caring for the King's revenues very similar to the system which William had in use in Normandy — a system which persisted in part at least until the times of Queen Vic- toria, and in the names of certain officials has lasted even to this year of grace 1920. This system and the modern treasury department are described in a subsequent chapter on the Exchequer. Chapter IX The King's Prerogative WILLIAM took possession of all the royal properties and sources of revenue and grafted on to these the Norman feudal system of land tenure. As King, William claimed the royal demesne, the royal forests and the perquisites of royalty, described above, en- joyed by his Anglo-Saxon predecessors. The Royal Demesne This was of vast extent. There were three divisions: — the forests which formed the King's hunting grounds and were secured against intruders by a savage code of special regulations known as the forest laws, the land held by the King's rural tenants and thirdly the holdings of urban tenants. This latter division included most of the cities, boroughs and towns of the Kingdom which originally had been founded on the folklands. The rents of these towns were collected by the sheriffs. All of the tenants of the royal demesne were liable to assist the King on any occasion of special expense — even to the tenth part of their goods. Feudal Aids As feudal lord he claimed the so-called feudal aids, namely, the right to levy a tax for his ransom should he be taken prisoner by an enemy; the right to receive a generous contribution from his people when his son was invested with the privileges of knighthood; and of a corresponding contribution upon the marriage of his eldest 1.61 1 62] BANKERS TRUST COMPANY ENGLISH PUBLIC FINANCE [63 i ' 1- ■ ti II daughter, to provide her with a dowry. Under the feudal system the King, in addition to these special aids which were never surrendered until six centuries later, was entitled in time of war to the personal services of his Knights, who must attend him with a complement of men, equipped for service. Purveyance Under the name of purveyance, the Ki^g was entitled to impress horses and vehicles to transport him and his entourage from one part of the country to another. He was entitled to appropriate any food or other articles which he required, paying for them such prices as he saw fit; this was called "preemption,** but in process of time was merged with the Anglo-Saxon idea of purveyance already noticed; the two rights going under the name of purveyance. This constituted a most obnoxious form of imposition which persisted for several centuries. Fines — Bona Vacantia Another source of income was from fines for trespassing upon the King's domains, especially for taking wild animals or even wood from his forests or fish from the streams therein. As the fountainhead of justice, the King was entitled to a share of the fines levied upon criminals of high or low degree. All treasure trove, t.. rt- On 00 »-• ooooooooooo oo - ^ W CI CS 1^00 000»00»0 lOO H< CO CO CO rO "^ to lO to t^ O C< t^ t^ »H 1^ HI C4 ' TfN rj-cototr^t^cvj co^^ H^ . t^ Co <^ »-• ^l^Vr^vO^ . M (O CO to •-• O rt-cOt^TtOSTj-M ONCS O C4^ w 00 tOOO 00 0\ to CO t^ Tl-00 M M T^TM^t^COCS "^co HH HI C< CJ wc^HHr«ooocic\tocir^ lO to to to tOvO VO vO t>.00 00 tOONONONQvCvONCNONO O :3 9 ;3 ^ ;t %s 3 O "PS < < I vj iif «^ C ^ CO 1^ (0 cd ^ 00 VO to VO ^ W CO W O O to tooo o o 00 i^ M Tf ON ov tovo to to CI w r^ 00 On O HH CO Tf tovO t^oo On O «-! VO VO t>» t^ l>» t^ t^ t>. t^ t^ l^ 00 00 to to G5S cd cd 1^ cd .^ vj il^ v^ B ^ 5i J^ S to G [93 A cd to VO covO vO t^ CO ON CO W VO •4^ u.-y l-H HH H^ HH h^ M 2 U u-ii-ic«w cd oP< '^ S ^ 2 « \ 94I BANKERS TRUST COMPANY ENGLISH PUBLIC FINANCE [95 m fi .ij ■ n As the war progressed, French commerce was driven off the seas. England was rapidly becoming the greatest com- mercial country in Europe. TAe Bank of England Foundea The requirements of the State and of business both called for better banking facilities than were offered by the Gold- smiths. The time was ripe for the introduction of corporate banking. Therefore, when a plan was brought forward for organizing a bank which would make an immediate large advance of capital to the State and which would stand ready to finance the growing requirements of the Government, and also of the commercial classes, it found a ready response, and in 1694 ^he Bank of England was organized. The National Debt Inaugurated Another idea which William brought with him from Hol- land was that of national borrowing. The new Government hesitated to place upon the people too heavy a burden of taxation. It was also thought to be a good policy to have the moneyed classes tied to the Government by direct invest- ment in the public funds. It is an interesting fact that the methods of public borrow- ing introduced during the reign of William III comprised practically every method since adopted. This indicates at once the resourcefulness of William's finance ministers and the conservatism of the English people. Then, as now, the debt assumed two principal forms — funded and unfunded. According to English Finance AccountSy the funded debt con- sists only of the perpetual debt, such as the debts due to the Bank of England and the Bank of Ireland and the Consols. The unfunded debt is debt of a temporary nature and debt repayable at the end of fixed terms. As some of the obliga- tions under this latter head are not repayable for many years the division based on established usage has become somewhat illogical. We will now consider the early forms of unfunded and funded debt. r r ii ti II! Ill h ;| \P Chapter XV Early Forms of the Unfunded Debt (1688-1707) npHE unfunded debt of this period consisted of tallies, navy ^ bills and Exchequer bills. In temporary advances by the Bank — as for convenience we will hereafter designate the Bank of England— we have the precursor of the "ways and means advances'' of present-day treasury statements. Tallies Prior to the Revolution the form which the obligations of the Crown usually took was that of loans upon "tallies" — a form of wooden stick given as a receipt for money payments. The tally will be found described in the chapter on the Exchequer. The Exchequer would at times find it inconvenient to meet its payments in cash. It would then give to the creditor tallies or receipts issued in anticipation of revenue. These were known as "tallies of assignment/' because a definite source of revenue was set aside for their payment. They were always accompanied by an Exchequer order entitling the holder to the payment of the amount at a set date in the future. These Exchequer orders were issued in negotiable form, being transferable by endorsement. They sometimes bore interest. Again, tallies with assignable orders of repayment were given in acknowledgment of money loans. These tallies were called "tallies of loan." The Exchequer order of repayment 96] ENGLISH PUBLIC FINANCE [97 was the really valuable document. It was written on parch- ment and signed by the high Exchequer and Treasury officials. These orders and the tallies accompanying them came in time to be known indifferently as "tallies," and the operation was spoken of as borrowing on tallies. Following is a copy of such a document of the time of Charles II. EXCHEQUER ORDER Reign of Charles II Order is taken by us, this day of , by virtue of an Act intituled, "An Act for granting a Supply to His Majesty of Two hundred and six thousand, foure hundred sixty-two pounds, seaventeene shillings and three pence, for paying off and disbanding the Forces raised since the Nine and twentyeth of September, One thousand six hundred sea- venty and seaven," that you deliver and pay of such of His Majestye*s treasure as remains in your charge of the summe of Two hundred six thousand fower hundred sixty-two pounds, seaventeene shillings, and three pence, arising by virtue of the said Act unto or his assignes, thesumme of in repayment of soe much money lent by him unto his Majestic upon the credit of the said summe of Two hundred six thousand fower hundred sixtie-two pounds, seaventeene shillings, and three pence, and paid into the receipt of his Majestie*s Ex- chequer, the said day of , as by a tally leavied at the receipt of the Exchequer, bearing date the same day, appears, together with the interest thereof, at the rate of eight pounds per centum per annum, at the end of every three months, until the repayment of the principall; and these, to- gether with his or her acquittance, or the acquittance of his or her assignee or assignees, shall be your discharge herein. The first loans of William III were raised in the usual way by tallies of loan charged on and in anticipation of various duties. The amounts required were so large that they accumulated more rapidly than the revenues allocated to I/' 11 \ Hi jl. I II '! !l 981 BANKERS TRUST COMPANY them could be collected. Then the Treasury frequently was not in funds with which to meet a given series of tallies because the collections were smaller than the charges. Thus the tallies were discredited and fell to a heavy discount. At the close of the war in 1696 the total deficiency in the funds upon which the tallies outstanding were charged was £5,160,000. To remedy this defect in the system Parliament swept all of the receipts into one fund, making all outstanding tallies a first general mortgage thereon. The debt upon tallies of loan was a very dangerous form of unfunded debt. As these loans were usually made only for short periods, the Treasury was under the necessity of making frequent renewals. These renewals were apt to come at inconvenient times. Navy and Army Supply Bills The records show, especially in the case of tallies of antici- pation, that the Army and Navy paymasters frequently had to submit to a heavy discount. As high a loss as 25 per cent. IS known to have been sufl^ered during the financial distress of 1687. In the following year the Treasury was authorized by Parliament to issue these tallies at 10 per cent, discount to those who would receive them in payment for navy services. In fact it was especially in connection with navy services that such depreciation chiefly occurred. The navy and army supply bills, as these obligations came to be known later on, were put on a sound basis in 1784 dur- ing the Treasury administration of the younger Pitt. The Exchequer Bill The introduction of the Exchequer bill in 1696 was a first step toward remedying this abuse, although it was not until ENGLISH PUBLIC FINANCE [99 175 1 that they entirely supplanted the tallies. They were issued in the first instance to supply a temporary need for a circulating medium while the coinage was in process of revision. Bank of England notes were not issued at that time in smaller denominations than twenty pounds. The Exchequer bills then issued amounted to only £159,169, but in the next year £1,500,000 were issued and in the following year £1,200,000 more. They were issued in even denomina- tions of five and ten pounds and to such public creditors as chose to receive them. There was no compulsion. They were negotiable, passing by endorsement. They bore in- terest. They were receivable by the Government in payment for all taxes, except the land tax, and when received could be reissued. Interest lapsed during the time they were in the Treasury. When the bills were covered with endorse- ments they were held in the Treasury and other bills issued in their stead. In 1707 an issue of Exchequer bills was authorized receiv- able for taxes, or payable at the Exchequer for any obligation due the Government, and exchangeable for ready money on demand at the Bank of England. An allowance of 4>^ per cent, per annum was made to the Bank for circulating the bills. These bills bore no interest when issued from the Exchequer, the amount of interest to be paid thereon being left to the discretion of the Bank. The Bank was then in a position to guide the Exchequer as to the amount of bills which could be safely placed in circulation. The amount outstanding from time to time varied with the exigencies of the Exchequer. The use of the bills as an active circulating medium was regulated by raising or lowering the denomina- tions in which they were issued. « m iii! |t!t| ai it ifft 100 ] BANKERS TRUST COMPANY The Exchequer bills first issued were worded as follows : No. i88 EXCHEQUER BILL Reign of William III Exchequer, 26 April, 1697. By virtue of an Act of Parliament passed in the viii year of his Maties Reign, This Bill entitles the bearer to Five Pounds, to pass in all payments to Receives qj. Collectors of any Ayds Taxes or Supplys for the service of the War for the year 1697, (except ye HI Shilling Ayd), to be reed and satisfied by y^ said Receivrs or CoUect^s under ye Penalties in ye Act contained. R. Howard A farthing a day (L.S.) interest. When the issues of Exchequer bills became excessive they were funded into other forms of debt. Thus they afforded a flexible credit instrument which could be increased or decreased as required by the necessities of the Government. Chapter XVI Early Forms of the Funded Debt (1688-1727) THE early forms of funded debt were annuities and the perpetual loans from the Bank and the East India Company and later from the South Sea Company given in exchange for their charter privileges. Annuities The annuity loans were made on the same theory as that upon which annuities are sold today by insurance companies. The seller of an annuity agrees, in consideration of the re- ceipt of a given sum of money, to make the purchaser annually or otherwise, during his lifetime, or for a specified period, a definite payment. This payment is larger than the interest would be upon the principal sum because upon the death of the purchaser, or upon the expiration of the annuity period the sum which he originally paid, or what may remain of it becomes the absolute property of the seller. That is, in the case of a pure life annuity, the seller and the purchaser specu- late upon the probable life of the purchaser, the latter to in- crease his income, the former with a view to profit. Present- day tables based upon a study by insurance actuaries of the expectancy of life are remarkably accurate in indicating the average expectancy of life at a given age. The whole prin- ciple of insurance is based on this theory of averages. The tontine policy was invented by an Italian of the name of Tonti. He devised a plan by which a group of individuals would agree with the seller of an annuity and with each other [lOI )i I 5; 102] BANKERS TRUST COMPANY that, as members of the group died, the survivors should have divided among them the amounts to which the decedents would have been entitled until eventually the entire annuity, or an agreed proportion thereof, would go to the final sur- vivor. The loan of 1692 for £1,000,000 was ofl^ered on this basis, the benefit of survivorship to last until the group was re- duced to seven. The idea was new in England and not under- stood, so the loan was a failure, only £108,000 being raised. At subsequent periods several tontine annuity loans were placed. In 1695 long annuities having 90 years' certain duration were introduced. The annuity principle for funded loans was the one chiefly used during the i8th century. It was often used in com- bination with other schemes. One of these which came to be increasingly in vogue until the close of the American War in 1783 was the lottery loan which will be found described in Chapter XVII. The ''Fund of Credit Idea There was a theory prevalent in the latter part of the seventeenth century and the early part of the eighteenth century known to economists as the "fund of credit" idea. It was in pursuance of this idea that the Bank of England was organized. The entire original capital of the bank as well as part of the deposits were loaned to the nation. This left the Bank as a basis for conducting its business a "fund of credit" founded upon its loan to the Govern- ment. Similar was the policy of Parliament in forcing the East India Company to pass on to the Government in exchange for its obligations the proceeds of its sales of stock. ENGLISH PUBLIC FINANCE [103 A bank known as the Million Bank was organized in 1695 on the same basis and for a while conducted a moderately successful business. Pushed to its logical conclusion, such an idea could be developed indefinitely. Its prevalence was not confined to England. The idea was at the basis of the organization of the South Sea Company which was chartered in 171 1 and of John Law's Mississippi Company which had such a meteoric career a few years later in France. The East India Company The original East India Company was chartered by Queen Elizabeth in the year 1600. To it was given the exclusive privilege of trade for fifteen years. This period was subse- quently extended from time to time, to Asia, Africa, and to America and intervening islands from the Cape of Good Hope to the Straits of Magellen. The company opened up trade with India and became^a rich and powerful corporation. The success of the company led to eflForts at competition and finally to the organization in 1698, under parliamentary act, of a dangerous rival. The consideration for the charter of the new company was that it should make a loan to the State of £2,000,000. When the stock was oflPered, the old company subscribed £315,000 and became the dominant factor in the new body. Finally, in 1702 in the reign of Queen Anne, the companies were merged and given exclusive privileges in consideration of a further loan of £1,200,000. The story of the East India Company is one of the ro- mances of commerce. It was through its efforts that the great Empire of India was won for Great Britain. Its fam- ous "East Indiamen'* held unquestioned pre-eminence among the merchant vessels of the world down to the middle I) m ' ill): i. •I ( 1 i f J 1 i 1 1 I I'll, f.^ f 1^^ 104] BANKERS TRUST COMPANY of the nineteenth century. Some of the most stirring chap- ters in England's commercial history are written around the voyages of these ships and the stories of Clive and Hastings will ever be memorable in England's military history. India has been the great imperial training school for a long line of illustrious British soldiers and administrators. The government was taken over by the Crown in 1858, after the mutiny. TAe South Sea Company The most spectacular operation based upon the fund of credit idea was that with the South Sea Company. This com- pany was at its inception to all intents a government under- taking, although incorporated (in September, 171 1) as a pri- vate company. It received a charter giving it exclusive trad- ing rights to the east coast of South America with certain limited exceptions and a monopoly of trading in the Pa- cific Ocean including the entire American Pacific Coast. In consideration of these trading rights, which were expected to have great value, the company was to ofl^er to exchange its stock for the outstanding unfunded government debt and in addition was to pay the Government ££;oo,ooo. The (government was to pay the company interest at the rate of 6 per cent, per annum upon all stock which it should thus acquire and in addition £8,000 a year for management. This oflFer was accepted, up to the close of 171 1, by the holders of upwards of nine million of government obligations. Further exchanges and adjustments, in 1714, made the capital and the debt balance at an even ten million pounds. A further small operation took place in 1719 when the sum of £1,746,844 was converted. At this time those in control of the company and their associates in the Government ENGLISH PUBLIC FINANCE [los determined upon an operation of no less importance than that of the conversion of the entire balance of the debt into the company^s stock. If this scheme could have been car- ried out the company would have had a capital of around fifty million pounds and would have practically monopolized the banking and trading business of the kingdom. However, the Bank and the East India Company would not come into the arrangement. It was then decided to go ahead without them. By wholesale bribery of the members of Parliament and of government officials, and by collusion with no less a person than the Chancellor of the Exchequer, the necessary legislation was obtained and the plan successfully launched. This was not accomplished without active competition from the Bank. The competitive bidding of the Bank led the company finally to offer the Government very attractive terms. Provided all of the holders of government obliga- tions, except the Bank and the East India Company, con- verted their holdings the company was to pay the Govern- ment £7,567,500 and was to surrender its trading rights, but with a tacit understanding with Aislabie, the Chancellor of the Exchequer, that they would be restored later on. The Government in turn was to pay interest at five per cent, per annum upon its obligations acquired by the company. It was agreed that after 1727 the interest rate should be reduced to four per cent. The advantage to the nation lay in this saving of one per cent, in interest and in the receipt of the cash payment of seven and a half million. Manifestly, even if trading rights were restored, which was part of the pro- gram, there was no legitimate basis for such a payment by the company. io6] BANKERS TRUST COMPANY ENGLISH PUBLIC FINANCE [107 %■ i\ ■ p m The Outcome of South Sea Scheme The profit to the promoters was to come from stock mar- ket operations on a huge scale and they little cared what hap- pened afterward to their new stockholders, the present holders of government debt. By spreading tales of the great profits to be derived from their trading rights— for they took good care not to let it be known that these had been surren- dered—and by the rankest kind of stock market manipulation they forced the quotations of their stock up to 200, then to 300, then to 800 and finally to 1050. As the stock advanced they offered the holders of government debt the privilege of exchanges at three to one, then at four to one. As their terms with the Government were for even exchanges they thus accumulated a large amount of treasury stock, some of which they were able to sell at the advanced prices and thus to accumulate a temporary dividend fund and one for use in manipulating the market. If the plan could have been car- ried out in its entirety the profits realized upon the private holdings of the "insiders" would have been immense. The magnitude of the operation and the rapidity of the advance proved to be their undoing. Other promoters came into the market with their schemes and a wild orgy of speculation took place. As usually happens in such a market, the col- lapse, when it came, was sudden and severe. The exchange of public securities for the company's stock had been achieved, but the speculators were most of them ruined and the public robbed. Strange as it may seem, the company remained solvent. Its new stockholders, most of them the former holders of government obligations, held the stock at varying pnces. The Government had to surrender its right to^the seven and a half million, and to make the company a temporary loan of a million pounds in the form of Exchequer bills. It carried out its contract to pay the five per cent, per annum until 1727 and then four per cent., which yielded a corresponding return upon the company's stock. The con- spirators were severely punished by loss of office, imprison- ment and loss of property. The worst sufferers were those among the public who were tempted to speculate in this and the various schemes which were promoted during the period of the craze. For a long time afterward stock speculation was much in disfavor and '''Change Alley" neglected. The subsequent history of the company can be quickly told. It existed until 1854 purely as an investment cor- poration holding government debt, receiving the interest thereon and disbursing it to its stockholders. Finally in 1854 the last of the debt was paid and the company liquidated. i I 'm Mv I Chapter XVII State Lotteries and Lottery Loans (1694-1826) ^HE first lottery loan was raised in 1694. The lottery ^ principle had long been known and used on the Continent and was not entirely new to England. T/ie First English Lotteiies The first English lottery of which there is any record was one projected in the reign of Elizabeth and issued under her patronage in the year 1569. The bill announcing it states that the same Lotterie is erected by her majestie^s orders to the intent that such commoditie as may chaunce to arise thereof, after the charges borne, may be converted towardes the reparation of the havens and Strength of the Realme, and towards such other publique good workes/' We have no rec- ord as to the amount which it yielded. A loan by lottery was raised in the time of James I, the proceeds being used to defray the expenses attending the establishment of the colonies in America. The first lottery loan of King William III was for £1,000,000. It was ofl^ered in shares of ten pounds. Annuities of £14 per cent, for 16 years were variously apportioned, £14 per cent, on every share and a larger pro- portion for the holders of 2,500 fortunate tickets. The principal prize was £1,000. The annuity of £140,000 was made a charge upon the salt duties. The operation was called the Million Lottery and the annuities the Salt Lottery Annuities. 108] ENGLISH PUBLIC FINANCE [ IO9 There were seven lottery loans from 1711 to 1714 in the reign of Queen Anne which yielded to the Government £9,000,000, but the bonuses paid to the holders of fortunate lottery tickets amounted to £2,734,000. The use of State lotteries in connection with the Spanish- Austrian War financing, 174S 1748, gave a guise of respecta- bility to this method of raising money. It is not surprising, therefore, to find that bridges were built over the Thames, and the British Museum founded with funds derived from lotteries. Lottery Loans in the American War It was in connection with the financing of the American War (1775-1783) that the lottery loan had its greatest vogue. The loans offered were all on the lottery basis. They were sold at a progressively heavy discount. In 1776 for £2,000,- 000 the Treasury offered for every £ 8 £100 subscribed 3 per cent stock 77 10 And three lottery tickets (in all 60,000) valued at £10 each; the prizes being funded, the holders of the fortunate lottery tickets received at par 3 per cent stock 30 or in all for £100 cash £107 10 The next loan was in 4% stock at par with a los short an- nuity; the two following were in 3% stock at par with more liberal annuities. Then came another at 4% at par with an annuity. Finally with the growing necessities of the Govern- ment and increasing depreciation of government stock it was necessary in 1781 to offer, for £12,000,000 in cash, £18,000,- 000 3 per cents and £3,000,000 fours. Again, in 1782, for £ 1 3 >SOO,ooo cash, theTreasury gave the same amount in threes, i -'ir no] BANKERS TRUST COMPANY ENGLISH PUBLIC FINANCE [III I SO% additional in fours and a liberal annuity. The loans of 1783 and 1784 were placed on substantially the same basis, although it was found necessary in 1783 to give only 25% in fours, but in 1784 it was necessary to give 50% again, but a smaller annuity was given. Every one of these loans carried the privilege of purchas- ing, at £10 each, a certain percentage of lottery tickets. For instance, in connection with the £6,000,000 loan of 1778 there were 48,000 lottery tickets. Each subscriber of £1,000 re- ceived an equivalent amount of 3% stock and an annuity for 30 years of £2 los on each £100, practically 5>^% for 30 years, with the privilege of purchasing eight lottery tickets for an additional payment of £80. In the case of the loan of 1782 a subscriber of £1000 received £1000 in 3% stock, £500 in 4% stock and a long annuity of 17s 6d on each £100. He also might subscribe for three lottery tickets. The prizes, which amounted to the total sum paid for the tickets, were not funded as they had been at other times, but were paid in cash to the holders of the fortunate tickets in the Spring of the following year. It would thus appear that the Government made no direct gain from the lottery itself, act- ing merely, as it were, as an agent or stakeholder, being bene- fited by the incentive given to the public to take the loan; How the Loans Were Placed An intelligent contemporary writer has given us a record as to how the Chancellor of the Exchequer was accustomed to place loans during this period. He tells us that it was usual for the minister to confer in private with a few moneyed men as to the terms of the loan and thus to determine a basis which would be acceptable to the market. We are not advised whether at this time the bankers "un- derwrote" the sale of the loan, but we know that at a later date it became customary for them to purchase the loan in bulk and then to distribute it to their patrons at a moderate advance. When a new loan was contracted prior to the pay- ment of the last instalment of a preceding loan, it was usual to give the preference to the contractors for the preceding loan. As it was illegal for a private individual to pay or receive over 5% interest for money, it was apparently deemed im- proper for the State to offer a higher rate. Therefore in order to draw capital to the Exchequer it was deemed necessary to make the offering attractive in other ways than by directly giving a higher rate of interest. The Treasury officials seem to have thought chiefly about the addition which the debt charge would make to the budget. They were not much con- cerned about the nominal par value of the debt. On the other hand the bankers naturally desired terms which would make the loan attractive to the public and thus readily ne- gotiable. At the same time they very naturally wanted such terms as would aflFord opportunities for a handsome profit on their part, if not at the time, at any rate in the subsequent dealings in the market. Hence it became customary during LordNorth*s incumbency of the Exchequer, as already stated, for every £1000 in money to give 3% and 4% stock, either or both, equivalent in market value to the money to be advanced, with an annuity in addition, in some cases, and, in every in- stance, with the privilege of purchasing a certain percentage of lottery tickets. The subscription was still further "sweet- ened" by making the money payable in installments over a period of months, the purchaser being entitled to all interest accrued from the date of the loan. This last privilege amounted in some cases to as much as two-fifths of a year's interest. 112] I III BANKERS TRUST COMPANY For the payments against each class of obligation issued receipts were given. These receipts were called ''scrip/* When handled together they were spoken of as the "omnium. '* Transactions during the period before the loan was paid up in full might be either in the several classes of ''scrip*' or in the "omnium.** The subscriber had the privilege of paying in full, which privilege if exercised entitled him to a cash dis- count. The way in which the dealers and investors in government loans estimated the market value of the "omnium** was this: The lottery tickets always had an independent market. Ex- perience showed that an immediate sale could be made of these tickets at a profit of from 2s to 3 s each, depending upon the total amount of tickets in the lottery. The value of the 3 per cent, or 4 per cent, stock received was determined by current stock exchange quotations. For example, in 1782, when the Exchequer offered £20,250,000 par value for £13,500.000 in money the account worked out something as follows; For £100 the subscriber received 1st £100 3% stock having a market value of, say 2nd £50 4% stock having a market value of, say 3rd A long annuity for 17 s 6 d, whose capi- talized value would be about . 4th Three-tenths of a lottery ticket by which he would have a profit of, say . 5th Discount, due to the fact that the stock when issued carried about two-fifths of a year's accrued interest for which the subscriber was not required to pay Total 60 40 17 £120 ENGLISH PUBLIC FINANCE [113 It does not necessarily follow that these prices were real- ized by the lenders. For instance, the price of 3% stock fluctuated in 1782 between 61 and 53^. However, the terms of the loans at this period were liberal and the oppor- tunities for profit were good. The diflPerent classes of scrip were actively dealt in in 'Change Alley, as a large speculative account could be carried with a very small amount of cash capital. The subscription receipts paid in full were called in the Alley "heavy horse," while the part-paid certificates were known as "light horse." The "light horse" was the popular variety for speculative purposes and therefore commanded a relatively better price. This was because it took much less capital to carry a given par amount, while the percentage of profit, if a profit were realized, would be larger. The State Lotteries IJ84-1826 We may now conveniently give the further history of the State lotteries. After 1784 the practice was discontinued of attaching lottery schemes to loan flotations, but until 1823 a certain percentage of the annual requirements of the Exchequer was regularly provided from the proceeds of the sale of lottery tickets. There were no lotteries in 1824 and 1825; and in 1826 the last State lottery was drawn. Ashton, in his "History of English Lotteries," tells us that the method pursued by the Chancellor of the Exchequer in placing the lottery tickets was to invite a few of the leading stock brokers to a conference, in which he would state his views. He would tell them that he intended to issue a lottery for, say, £500,000 in £10 tickets — all to be distributed as prizes. He would then ask at what m M 114] BANKERS TRUST COMPANY price they would tender for them. A competition would then ensue and finally an ofFer might be accepted of, say, five pounds premium a share, which would give the Government a clear profit, without risk, of £250,000. Of course, those who got the concessions put up the price of tickets, but as single shares were seldom bought— most people taking a fourth, an eighth, or a sixteenth of a ticket— the rise was not much felt by the public. Although private lotteries were illegal, nevertheless they seem to have flourished. The example set by the State was followed by people in all walks in life. There were lottery tailors, lottery staymakers, lottery glovers, lottery barbers, "where a man being shaved, and paying threepence, may stand a chance of getting ten pounds.'* There were even lot- tery shoeblacks. There were frequent cases of suicide traced to the lotteries. These were due to the losing of employers' money and trust funds by those who were tempted to gamble in this way and to disappointed hopes of gain which perhaps meant the loss of one's entire patrimony. There were many fraudulent practices connected with dealings in the lottery tickets. The prizes varied, ranging in some instances from as high as £30,000 down to £500. There were regular, reputable brokers who made a business of dealing in lottery tickets or shares in tickets. We are told that no small part of the business of the stock broker consisted of dealings in lottery tickets. There were also many disreputable persons who de- vised all sorts of schemes to make money in connection with the lotteries. One scheme which flourished for some time was, for a consideration, to insure the receipt of prizes. This was in reality pure betting. In return for say, a shilling, a pound would be promised if a certain specified number turned ENGLISH PUBLIC FINANCE [115 up. Of course these insurances were illegal, but they were so profitable to the officekeepers, that no penalties could keep them down. Any sum might be insured from one to twenty guineas. The sum charged for an insurance at the commence- ment of a lottery drawing gradually increased as the drawing proceeded, depending on whether the large prizes came out early or late. The class preyed upon were principally domes- tic servants. In 1800 it was computed that on an average each servant in the metropolis spent annually, as much as 25 shillings in this reprehensible practice of lottery insurance. This was when the draw:ing of the lottery was extended over days or even weeks. As time went on and the evils of lottery became more and more apparent, there was a growing feeling that it should be abolished: — still, it was not until 1826 that en- lightened public opinion finally forced its discontinuance. Those who favored the lottery claimed that properly con- ducted it was a voluntary tax, contributed to only by those who could aflFord it, and collected without trouble or expense. They claimed that most of the evils connected with the lottery had been due to the early practice of protracted draw- ings. In 1809 this abuse was done away with and the lottery was decided in one day. Ashton tells us that extraordinary efforts had to be made to dispose of the tickets for the last lottery. The public had become disgusted with this method of Government financing and were glad to see it discontinued. The State lotteries yielded a gross income of some £45 million, but the expenses of management and prizes absorbed over £33 million. Thus the net income from this source was about £12 million or about £218,000 a year for the 55 times between 1755 ^^^ 1826 when this method of raising revenue was used. ENGLISH PUBLIC FINANCE [117 ^^. Chapter XVIII The Sinking Funds XI/^E may now profitably consider the early sinking fund operations. There were two of these, known respec- tively as Walpole's sinking fund and Pitt's sinking fund. Walpoles Sinking Fund When Robert Walpole became Chancellor of the Excheq- uer m October, 1715, the public debt, including the capital- ized value of the annuities, amounted to around fifty million pounds and the annual charge to £3,164,000. The people were genuinely alarmed at the magnitude of the debt. It had increased during the thirteen years of Anne's reign over 200 per cent. The debt charge had risen from about £1,200,000 to over £3,000,000. A capital levy was being serioMsly urged. It was imperative that steps be taken to quiet the alarm and to stop this discussion about a capital levy which was most distasteful to the moneyed classes. Therefore, Walpole brought forward in March, 1717 a plan for a sinking fund. Before he had fairly launched this plan there was a change in the Government and he was out of the Exchequer for four years, beginning with April, 1717. However, his plan was adopted by Stanhope, his successor, who laid proposals before Parliament on May 20, 1717, which led to legislation appropriating the surplus revenues of the Bank, the South Sea Company and what was known as the General Fund to the redemption of the debt incurred prior to December 25, 171 6. By Christmas, 1727, £6,626,000 of this old debt had been retired, but in the interval it had been necessary to borrow 116] new money so that the debt had actually increased about £2,000,000. Walpole, with all his ability as a financier, was unwilling to secure a radical reduction of the debt by imposing worth- while taxation for that purpose. He allowed the quarter of a century between wars to pass with only a nominal debt reduction. After 1727 the sinking fund became inoperative for debt reduction, the funds appropriated to it being diverted to meeting current expenses, in order that the taxation of the landed classes might be reduced. However, as a result of successful refunding operations, chiefly in connection with the South Sea Company's operations as described above, the debt charge was reduced between 1714 and 1739, by no less a sum than one million pounds. Pitfs Sinking Fund If the people of Walpole's time were appalled at the size of the debt, those living half a century later had good reason to be still more alarmed. In the interval the Seven Years War and the American War had raised the debt fivefold and the debt charge nearly in the same proportion. Therefore, after putting his house in order by introducing needed reforms in taxation and funding the floating debt Pitt, the then Chan- cellor of the Exchequer, brought forward, in 1786, a plan for a sinking fund which, within a period of forty-five years, would entirely free the nation from debt. The sinking fund was to be a sure specific against the dan- gers of a public debt. In fact it was to be a prophylactic which would make it quite safe on occasion to increase the debt. This, because with each increase of debt there was to be an increased fund with which to insure its cancellation. One million pounds a year was to be taken from revenue 1181 II 3!« BANKERS TRUST COMPANY and paid to the Commissioners for the Reduction of the National Debt, in whose favor also the existing life and terminable annuities were, on their expiration, to be con- tinued. The Commissioners were to invest their income from all sources in purchase of the funded debt, until the annual sum received by them amounted to £4,000,000, after which dividends on capital stock to be paid off by them, and any life and terminable annuities which should mature, should cease and be considered as redeemed. Sub- sequently £400,000 a year was added to the fund; also a sum equal to the interest saved by any reduction of interest on any redeemable stock; and one per cent, on all new loans issued for public purposes. Fallacy of Pitfs Scheme It is difficult to understand the vogue which this theory had for nearly half a century. The general principle that money placed at compound in- terest will double itself at 6 per cent, in about 12 years, at 4 per cent, in about 18 years, and so on, is undeniable, but the error lay in assuming that to buy up and "keep alive ^' the Nation's own obligations was equivalent to placing the funds of the sinking fund at interest. If peace had continued for an indefinite period, and if the additions to the fund had scrupulously been made from taxa- tion alone, it would have accompHshed its purpose. But this would not have been because of the accumulations from compound interest, but because an amount, de- termined by such calculations, had in reality been taken from the people in the form of taxation. Strange as it may seem, most of the brightest intellects of the day were confused on this matter. If England could have placed a fund in some ENGLISH PUBLIC FINANCE [119 other country, or in Mars, to accumulate at compound in- terest, the theory and the practice would have been in harmony. So long as the fund had to accumulate at home, it was all one whether a straight annual appropriation for the reduction of the debt were made from revenue, or, an appro- priation made determined by the circumlocution of the sinking fund legislation. However, when, as happened later, the Commissioners borrowed money for the sinking fund, instead of obtaining it by taxation, and when, to cap the climax, they paid more for this borrowed money than the rate of interest borne by the debt redeemed, the situation became a serious one. As Tom Paine tersely and humorously put the case in one of his nu- merous pamphlets: "As to Mr. Pitt's project of paying off the National Debt, by applying a million a year for that purpose, while he continues adding more than twenty million a year to it, it is like setting a man with a wooden leg to run after a hare. The longer he runs the farther he is off." The lesson of the ineffectiveness of the cumulative sinking fund, as thus administered, was not learned for a number of years. It was not until 1829 that this fallacious method was finally abandoned, and not until after £330,000,000 had been raised at an average cost of £5 os 6d per cent, per annum, to pay off debt carrying interest at £4 los od per cent. The difference between these two rates is los 6d per cent, per annum. Therefore, before the nation awoke to its folly it had increased its annual fixed debt charge for this purpose by £1,628,000! Modern Sinking Funds Finally the discovery was made that the only way to pay off the debt was from an excess of clear revenue, derived from I20] BANKERS TRUST COMPANY }} li m taxation, over the expenditures for current needs, upon which principle the sinking fund functioned from 1829 to 1914. However, the reduction in debt was small because of the un- willingness of Parliament to make any substantial appropria- tions for the purpose. The terms of existing sinking funds are given in notes, following the National Debt Statement. In 1868, and again in 1894, ^he plan was adopted of issuing terminable annuities in lieu of funded debt. In 1868 £24 million of Savings-Bank stock was cancelled and an annuity of £1,760,000 substituted, while in 1884 Chancery stock to the amount of £40 million and over £30 million of post-office-savings-bank stock were similarly treated. Thus the nominal principal of the debt was reduced and the annual charge increased, just reversing the South Sea Company oper- ation of 1720 and before. The advantage of the operation is hard to find, as the Government of course remains obligated to the savings banks' depositors and the estates in chancery for the full amount of their claims. Chapter XIX Early Refunding Operations REFERENCE has already been made, in discussing the affair of the South Sea Company, to the refunding operations prior to 1739. There were only two refunding operations of importance between 1739 ^^^ 1817. Refunding Operation of ly^g — ^'Consols'' Advantage was taken of the period of peace which fol- lowed the War of the Austrian Succession to take meas- ures to reduce the interest paid on the debt to a uniform rate of 3 per cent. At that time the funded debt, apart from that due to the Bank of England, South Sea Company and East India Company, consisted of various debts con- tracted at different periods under several Acts of Parilament and charged on many distinct funds. Parliament enacted a law in 1749 that all public cred- itors at four per cent, should be paid the amount of their holdings except those who signified their consent to accept - three per cent, after December 25, 1757. These were to have their present interest continued until December 25, 1750, and then to receive 3>^ per cent, until December, 1757. The amount of these debts, including those due to the Bank and the companies was £57,700,000. The greater part of the creditors accepted the proposition. A modified offer, not quite so favorable, was made to those who held out and was generally accepted, with the result that the Treasury was called upon to pay off only about £3,000,000. As a result of these operations and the payment of £3,000,000 navy debt, there was a net decrease, in round figures, of nearly £5,000,000 [121 122] BANKERS TRUST COMPANY ENGLISH PUBLIC FINANCE [123 ^il ^ 1 i n in debt before the outbreak of the Seven Years War and a reduction in the annual charge of £539,000. As an indica- tion of the state of the national credit it may be noted that the three per cents which in 1748 sold as low as 76 advanced to an average price of about par in 1749-175 1, and upon the successful consummation of the refunding operations sold up to 106% in 1752. The success of this operation reflected great credit upon the administration. It also gave evidence of the prosperous condition of the country, notwithstanding the long war which it had just passed through. In the session of 1751-1752 an act was passed consolidat- ing certain of the 3% issues into one joint-stock of 3% annuities. Thus originated the "Consolidated Annuities" or "Con- sols*' as that part of the perpetual debt held by the public has ever since been known. Funding the Floating Debt tn IJ84. In 1784, when William Pitt the younger assumed the duties of his office as Chancellor of the Exchequer, he found outstanding floating debt for over £18,000,000, chiefly in the form of navy victualling and transport bills. From the time of Charles II the payments for navy victual- ling and stores had been made in bills payable at uncertain periods. They were taken at a discount which increased very considerably at every time of war. During the last five years of the American War this discount had varied from wyi per cent, to \(M, per cent. Pitt brought about legislation by which the Admiralty was required to make all of its payments in bills drawn at ninety days. Thereafter, as these bills were always dis- charged with rigid punctuality they came to be considered and accepted substantially at par, with a resultant large saving to the Government. Of the navy bills outstanding when he assumed office Pitt funded into 5% stock £6,400,000 in 1785 and £9,800,000 in 1786, giving for each £100 debt £107 10 s 6d in the first in- stance and £111 8 s in the second. Pitt was desirous of com- pleting the entire transaction in 1785, but in deference to the views of the bankers spread the operation over two years. In view of his later change of policy in that respect it is of interest to note his statement to Parliament, "that a fund at a high rate of interest is better to the country than those at low rates; that a four per cent, is preferable to a three per cent, and a five per cent, better than a four." He explains — "the reason is that in all operations of finance we should al- ways have in view a plan of redemption. Gradually to redeem and to extinguish our debt ought ever to be the wise pursuit of government. Every scheme and operation of finance should be directed to that end and managed with that view." Competitive Bidding Inaugurated Former ministers had made the placing of loans a source of patronage. Pitt resolved to consult the public interest only. He gave notice through the Governor and the Deputy- Governor of the Bank that he was ready to contract for the loan with those who would ofi^er the lowest terms. Sealed tenders were required. He thus established a salutary prece- dent which has been followed in connection with all sub- sequent loans not off*ered at fixed prices. It may be noted in passing that the purchasing of army supplies was placed by him on a similar competitive basis, thus ending scandalous practices of long standing. (T- hiip r y : m I ; : 4 . Chapter XX Financing the Great French War (1793— 1817) ^ I ^HE outbreak of the French Revolution in 1789 leading -^ up to the atrocities of 1792 which culminated in the execution of Louis XVI on the morning of January 21, 1793, ushered in a period of internal strife and of foreign wars such as France and the world had never before experienced. With the declarations of war by France in February, 1793, against England, Holland and Spain, the period of peace which Eng- land had enjoyed since the American War and the hope of a further similar period was abruptly ended. The administra- tion found themselves face to face with a foreign war, while for some time they had been compelled to deal with dangerous uprisings at home. Thus ended a period of nine years, per- haps one of the most prosperous and happy that England had ever known. It had not been a period of prosperity for all classes, because the radical changes in the conditions of the industrial and agricultural classes had brought cruel hard- ships to many. However, taking the country as an entirety, it had been a time of decided progress. This period of prosperity terminated in a severe financial crisis and con- sequent "hard times.** A succession of bad harvests caused a scarcity of food and resultant high prices. Throughout the commercial world the war was preceded by "a great revul- sion and derangement of commercial credit.*' There were many failures of mercantile houses, while no less than 26 country banks were forced to close their doors. In April, 1793, the distress became so acute that the Government 124 1 ENGLISH PUBLIC FINANCE [125 found it necessary to apply extraordinary remedial measures. At a meeting of merchants held at the Mansion House on the 23 d of April it was voted to apply to Mr. Pitt to advance Exchequer Bills on the security of goods and merchandise and other property. The request was referred to Parliament and on the 29th of April, Exchequer Bills to the extent of £5 mil- lion were ordered applied to advances. This measure proved to be very successful in allaying fear and distrust. The fact that assistance could be obtained if needed made it unneces- sary in most cases to ask for it. The Loan of ijgj It was in such a market as this that William Pitt was com- pelled to arrange for his first war loan of £4,5cx),ooo. This loan was obtained by a sale of 3 per cent, consols at 72, making the money cost about 4^% per annum. The effect of the business crisis had been to carry down the price of consols from quotations of around 90 which had been current during August, September and October, 1792, to below 80 in the latter part of November. Quotations in January, 1793, had averaged about 75. Upon the declara- tion of war they broke to 72 and under, so that Pitt*s bargain was a fair one for the Exchequer, although prices rallied al- most immediately to around ^^ and did not go below 74 dur- ing the rest of the year. The choice of the 3 per cents, while contrary to Pitt's previously expressed preference for stocks at higher interest rates and therefore selling nearer to par, was fully justified by the fact that thus a better bargain for the Exchequer could be made, as the fours and fives were selling relatively much lower — that is, on a higher interest basis. The war thus entered upon lasted until the middle of the 4) h !3fl if i -l 126 1 BANKERS TRUST COMPANY year 1801, although the formal signing of the articles of peace at Amiens did not take place until March, 1802. The war ended in a draw. One by one the other antago- nists dropped out until England and France alone were in- volved. Each nation was ready for a cessation of hostilities. Nothing had been decided and in the settlement Great Brit- ain gave up practically all acquisitions of territory which she had made. Great Britain expended during the nine years about four hundred and twenty million, 60 per cent, of which represented the cost of maintaining the army and navy, against a normal peace expenditure of about one-fifth of this amount. The interest and management of the debt absorbed another 30 per cent, so that over 90 per cent, of the expenditure of the period may be said to have been due to war — past and current. Of this great sum, which was twice the average expenditure during the period of the ** extravagant" Amer- ican War, 55.60 per cent, was raised by taxation and the re- mainder by borrowing. TAe LiOyalty Loan of Ijg6 During this period there were eighteen different loan ne- gotiations. We have seen that the first loan was placed at a little over 4 per cent. In 1794, 1795, and the early part of 1796 it was necessary to pay over \yi per cent. In Decem- ber, 1796, the money cost over 5^ per cent., while in 1797 and 1798 it cost from 6% to S^^ per cent. In 1799 and 1801, 55^ per cent, was paid, but in 1800 over £20,000,000 was secured at about 4^ per cent. Most of the loans were issued as threes with annuity bonuses and in some cases with a per- centage in fours. The rate on Navy and Victualing Bills, issued as fives repayable after relatively short periods, was substantially higher than that paid on the annuities. The ENGLISH PUBLIC FINANCE I 127 average actual rate paid on all loans, long and short, was almost exactly ^% per cent. The Loyalty Loan issued in December, 1796, was offered for public subscription, books being opened at the Bank. It was a year of great difficulty. The progress of the war had been discouraging. There had been a run on the Bank involv- ing a suspension of specie payments. There had been a serious mutiny in the navy, and symptoms of discontent appeared in the army. Under these circumstances, with the pressure of taxation keenly felt, the ministry believed that a resort to the ordinary methods of raising a loan would be perilous. It was determined, therefore, to throw the subscription open to the public and to appeal to the patriotism of the country. This course was fully justified by the outcome. Within fifteen hours the entire £18,000,000 was oversubscribed. However, the loan was at four per cent, discount before the payment of the deposit. This discount afterward became 8 per cent, and finally 14 per cent., but every payment was duly made. Final Period (l8oj-l8l^) Such a peace as that signed at Amiens was not destined to be permanent. British statesmen felt that it was danger- ous to give such an antagonist as Napoleon time in which to grow strong. They therefore took advantage of a dispute in regard to the disposition of Malta to renew the war in May, 1803, ^^d thus to arrive at a settlement which would be con- clusive. Notwithstanding the fact that they caught Napo- leon unprepared, the war proved to be one of long duration. The burdens which it imposed in the form of taxation and debt, deranged industrial conditions and unsettled commerce were tremendous. It has been said that it was a war of the ^ * . I ■ if 128] BANKERS TRUST COMPANY English people rather than of great leaders. Pitt, who had dominated the first period, was out of office when hostilities were renewed. Although temporarily called back under the stressed conditions of 1804 he had only been at the head of the Government a couple of years when he died in 1806, brokenhearted at Napoleon's apparent invincibleness. Thus we find no one master mind dictating the financing of this period. The Cost of the War During the second period of the war, terminated by the treaty of Paris, signed November 20, 181 5, the annual expense just about doubled that of the first period. Eliminating an estimated normal expense based upon the budgets of the last preceding peace period the average annual war expense of the first period of the war was approximately twenty-eight million and of the second period sixty-two million. Taking the entire period of 23 years of war into consider- ation the total cost in round figures was about £1,200 million, a yearly average of £52,150,000. This total is accounted for as follows: Direct increased military and naval expenditure, £826,223,000, increased cost of civil government £111,212,- 000, increased debt charge £262,077,000. The extraordinary expenses of 18 16 are included in these figures as the accounts of this year were still considerably affected by the aftermath of the war. In making estimates such as this most writers include only the direct military expense. This manifestly leads to an underestimate. The increased cost of civil government due to the war conditions should surely be taken into consideration and there should be no difference of opinion as to the propriety of including the increased burden of the ENGLISH PtJBLIC FINANCE [129 national debt, to the extent that the increase in debt is caused by the financing of the war. It is unfortunately true that with each recurring war there is not only a permanent addition to the debt charge, but also to the cost of civil government, while the military ex- penditure rises to a new level. Furthermore, each recurring war costs more for each year of war than does its predecessor. The first three wars oc- curring after the Revolution cost on the average four million sterling, for each year of war; the next, 12 million; the next, 13 million; the first part of the Great French War, 28 million, and the last, 62. The two other great wars of England pre- ceding the greatest of all which has just ended — namely, the Crimean and the Boer Wars — cost on the average, respectively, £24 and £70 million for each year of war. This is not a place to moralize, but the mere statement of the facts alone is an eloquent indictment of war as a method of settling inter- national disputes. How frequently we find upon the con- clusion of a war that the articles of peace in no way refer to the ostensible cause of the war. Still, if ever a war was really justified, this twenty-three-year war of England's was such a one — the first part of it a stand against the spectre of world anarchy and the second against the overweening ambition and autocratic plans of Napoleon. The Cost Met from Taxation The financing of the war covered the Exchequer period from October 10, 1793, to January 5, 18 17. It is impossible to give the statistics with absolute accuracy, as in 1801 a change took place in the method of stating the accounts. Prior to that date the returns are on a "net" basis — that is, the cost of collection and management of the revenues is i3ol BANKERS TRUST COMPANY 1' I deducted therefrom. Thereafter the gross revenue is given and the expenses of collection are stated on the other side of the account. The returns are said to be on a "gross** basis. Therefore, for part of the period under review we have "net" returns and for part "gross** returns. However, this fact does not seriously interfere with securing a review of the finance of the period. The striking thing to note is that eliminating all items having to do with the debt, the other expenses were entirely met from revenue collections. The expenses of civil govern- ment averaged £6,708,000 a year and the military expenses ^39>2i3>ooo, an aggregate of about 46 million. The revenue receipts averaged £49,575,000 a year; or, taking the aggre- gate figures for the 24 years, civil and military expenses were £1,117,656,000 and revenue receipts were £1,202,195,000. It was during this time that pamphlets without number were being issued from the press in regard to the debt, its great and growing burden, the necessity for the cost of wars being met by the generation which carried them on and the blessings and operations of the sinking fund. The borrowing which took place provided the means for temporarily bridging gaps between expenditure and revenue, for meeting the interest charge on the inherited debt and for feeding the sinking fund which, strange to say, was adding to the debt instead of reducing it. For the 24 years the charge for the interest and management of the debt was £511,306,- 000 — £227,655,000 on account of pre-war debt and £283,- 651,000 on account of new debt. The operations on account of the debt ran into heavy figures as will be seen from an examination of this table. ENGLISH PUBLIC FINANCE f I3I SUMMARY OF DEBT OPERATIONS Great French Wars October, 1792 — February, 1817 In Millions Sterling Credits Debits Money Values £ ^ Gross amount borrowed i>3i5 • • • • Disposition: Debt paid off . . ^^^ Interest and management on new or war debt 283 Net benefit to Exchequer from war borrow- ings • ^51 1.315 1.315 Thus the net benefit to the Exchequer from net borrow- ings of £434 million, money values, was only £151 million, iiK% of the gross amount borrowed, sufficient with say £77 million from revenue to pay the charge of £227,655,- 000 for the pre-war debt. In 1793 the total debt was £239,663,000. On the 5th of January, 1817, it was £850,000,000, an increase of £610,- 337,000 — par value. The debt charge meanwhile had in- creased £22,623,000, from £9,432,000 to £32,055,000. Mr. Chisholm, in his monumental report on the debt, estimates that of the net amount borrowed during this period about one-third — say, £192,868,000 — was required for the sink- ing fund. The annual charge for interest on the new money borrowed was £5 3s 9d per cent., while the similar charge on the debt redeemed by the sinking fund was £4 i6s 8d per cent. The difference between the two rates of interest, equal to 7s id per cent., is the annual amount lost by the sinking fund operations on the £192,868,000 redeemed; or, at the rate of about £683,000 added fixed charge per annum. t 132 1 BANKERS TRUST COMPANY ENGLISH PUBLIC FINANCE [133 1 4 Bebt vs. National Wealth The burden of the debt upon the community, while heavy, was by no means "crushing," a term by which it has fre^ quently been described. The per capita debt was about fifty pounds steriing, or not quite one-third of the estimated per capita national t\ 1 1^" ''^'^ ^^ '^' ^"^^"^^" War, another period when the debt was "crushing," the per capita amount was estimated at about £29 and the debt at about 25 per cent, valuers ""^ '^^^''^* ^^^'^ estimates all deal with par Debt Charge vs. National Income On account of the policy of discount financing pursued in the negotiation of loans, a better way to judge of the actual burden of the debt is to institute a comparison between the annual charge for interest and maintenance and the estimated national income. The growth in national income had been very great since the beginning of the American War in 177c At that time the national income was estimated to be £100 - 000,000. ^ At the close of that war an increase of about 25 pJr per cent, is estimated to have taken place. At the beginning of the Great French Wars the people of England were probably m receipt of an aggregate income of £160,000,000. So far our estimates apply only to England and Wales. In 1802 we may add Scotland and, too, we are now dealing with more reliable figures, as we begin to have the income tax returns as a basis. We seem to be warranted in accepting an estimate of £230,000,000 for the national income at this date. At the close of the Napoleonic wars in 1815 we have an esti- mated income for the 17 million people of the United King- dom of Great Bntain and Ireland of £400,000,000. It is believed these estimates fairly reflect the facts, for we know, notwithstanding the toll of the wars, that the popula- tion had been rapidly increasing; also commerce, as evidenced by the increase in shipping and in the values of exported and imported goods; also the volume of business, as evidenced by the steady increase in the yield of the income tax and the fact that the people at the same time were able to pay the enor- mous excise taxes. Therefore we seem to be justified in accepting them as a measure of the burden of the debt at the times indicated and of its comparative weight. So we arrive at the interesting summary statement contained in the table on page 134. In interpreting this table the fact should not be lost sight of that the purchasing power of money has varied considerably during the two and a third centuries. The relative burden of the debt cannot be judged merely by comparative statistics in terms of money. If we had index numbers of prices such as exist today covering the entire period and could adjust money values accordingly we would probably discover that today's burden is relatively not materially greater than at other crucial periods. This table demonstrates in a striking manner why it was, notwithstanding all the direful prophecies of disaster which were made at all of these periods, that after each war England shook herself like a great ship coming up out of the trough of a stormy sea and went on her way unscathed. That reason was because, although one of the oldest of the nations, she was nevertheless full of vitality and rapidly growing in popu- lation and in material resources. Students of this period point out that because of the integrity of property and con- tracts in England, she became to an important degree during the great war the custodian of the savings of Europe. Thus 1 i^ m 1341 BANKERS TRUST COMPANY il i-i (s, «i> ffl 41 iM H CQ 0^ W Q (4-. !I3 m D Cl, CO a: CO w ffi H ct * > 'i , 0) CO • ( y 4> 09 o 4) S o u c (0 c ^^ o CX) -g 00 5 vo ^ bx) (« U a O H C o JS 'B a o CL, a> 4) cd 0) c o 00 O iCvO pO 00 vO CO ^ 00 coco 10 rO»-i 0\ >-i rf vO vO 00 to CS NO to Tj- rj-vO ^|*^iO VO O 00 00 0) OJ wioiowt^ •-• 00 Tt- (^ to M vo r^ «^ U to 1000 t^r^ Cfj 00 00 00 O tOvO t^ t^ 10 ON 00 o 000 rO«O00 O rO »HI-tH-IMhHI-l dCI o £ »^ ti oj h O c« 0) 6 CO covo O ThrfiOOiOO 00 vOvOt>»OC^vO COO M i-i M H rh ^ 00 t^OO l^ Q HH 00 (S •-• 00 CMOlO o o ON -rJ-VO 10 ON ON cor^ 00 l^ t^r^vOrh cocococococo coco • N 00 CI ^ (^ cvj On <^^ O M CO c^ q^ q^ ^ hT iM* CO cT M vo 00 vo 10 CO CO M T^rhOv On 00^ O C^ cT M CO M •-• W 00 O M Ov »0 M t>» VO VO VO tN.00 00 O O M M I I I O^ O i-H fo VO r>.r>.t^ On On ON On W C< M CI On lOvO 10 10 CN| Tj-iovo r^oo ON i>>. i^ t^ rs. t^ r>. On On On On O O M 0< CI M i-i CI M 1^ O M 00 00 1010 s o .1 I I I CO 3 il 3.3.2 60 fi •*■* «* « r o > >» •O bO •^ ed rt CO 60 o — 00*0 •^ 'SB a;.S i ENGLISH PUBLIC FINANCE [13s she was enabled to finance her trade on an ever increasing scale as well as to finance the stupendous costs of the 23 years of war. Sowing and reaping in national finance is thus illus- trated. Another moral phase of the situation which cannot be tabulated but which is at the base of England's credit structure, is that not once apparently was there even a thought of repudiation — even when the burden of debt pressed heaviest. Fears there were in plenty of the ability of the nation to continue to meet its obligations, but never once a suggestion of trying to get rid of the obligations in any other way than the good old-fashioned one of paying. ENGIISH PUBLIC FINANCE [137 Chapter XXI Revenue and Expenditure (1688-1817) TOURING the centuries which preceded the English Revo- -L^ lution of 1688, the EngHshman had held the reins over his autocratic rulers and had finally won a state of compara- tive political freedom by his control of the purse. The King's hereditary revenues were passed on from one sovereign to the next, also those of which it was customary for Parliament to make a life grant at the beginning of each reign. However, Parliament retained absolute control over other sources of revenue which it voted from year to year. Thus, by making it necessary for the King to call them together to vote at least a part of the supplies, the Commons were able to control, to some extent at least, the acts of the King. When William III consented to assume the responsibilities of the throne in 1688 he expected that the usual grants would be made to him. To this Parliament in part demurred. No change was made in respect of the hereditary revenues, but Parliament declined to make the usual life grants. Instead, the revenues usually so granted were made renewable at the end of four years. Thus was confirmed, or more properly reasserted, the principle of a short grant of some considerable branch of the revenue with a view to keeping the sovereign dependent upon the will of Parliament. It is not our purpose to consider in detail the various forms of State expenditure, nor do we intend to take up in detail 136] the methods of raising revenue during the period under re- view. Purposes of Expenditure The broad general purposes of expenditure were, as they are to-day, the expenses of civil government, the expense of the maintenance of the military establishment and the charge for the interest upon the national debt. An inspection of the table on page 138 will show how these expenses grew from one historical period to another. The table is arranged to show the average annual expen- diture for each period of peace and of war from the Revolu- tion until the end of the French wars, and for the peace period immediately following. The important facts to notice are the progressive increas- ing expense of each war period and the fact that after each war the level of peace expenditure is raised. The Growing Burden It will be observed that the war period of the reign of William III cost on the average about five million pounds a year. The militaristic administration of Anne cost half as much again. During the Seven Years War the expenses were double those of Queen Anne's reign. During the American War they were fifty per cent, higher than during the Seven Years War. For the first part of the Great French War the expenses were double those of the American War period, while the expenses of the last part of the French war aver- aged nearly twice those of the first part. With these figures m mind let us now turn to the record of the intervening peace periods. Here we find this interesting sequence — ^we will use round figures. Following the peace of Ryswick in 1697, 1; * u m if H ' 1 138] BANKERS TRUST COMPANY the average annual budget was £3,80x5,000; after the peace of Utrecht in 1713, about £5,700,000; after the peace of Aix la Chapelle in 1748, £6,600,000; following the peace of Paris in 1763, £9,900,000; after the peace of Versailles in 1783, £16,600,000; while looking ahead into the next period we find that for the years immediately following the peace of Paris in 18 15, peace expenses rose to a new level of £56 million a year. It is true that a most important part of the growing cost of government was due to the cumulative effect of the charge for the growing public debt. Again it seemed to be considered necessary after each war to maintain the military establishment on a new level of expenditure. Still, even the expense of civil government, the strictly peace establishment, exhibited the same tendency to expand. The table follows: GOVERNMENT EXPENDITURES 1688-1830 Average per Annum for Alternate Periods of War and Peace In Millions Sterling Period 1688-1697 1698-1701 1702-1714 1715-1739 1 740- 1 749 1750-1755 1 756- 1 766 1 767- 1 775 1 776- 1 785 1 786- 1 792 1 793- 1 802 1803-1817 1818-1830 Character of Period Wars of William III . . . Peace Wars of Anne Peace Spanish-Austrian Wars Peace ....... Seven Years War .... Pecu:e American War .... Peace 1st Period— Great French War 2nd Period — Great French War Peace Peace 3.8 . a • 5.7 ... 6,6 • * . 9,9 ... 16,6 • • • ... 56,2 War 5»i ... 7.6 9.5 . • • I4f5 ... 21,8 • • • 45>4 80,5 ENGLISH PUBLIC FINANCE [139 Sources of Income Let us now turn to the other side of the account and see from what sources the income was derived with which to meet these constantly growing expenditures. Here we have some surprises awaiting us, particularly when we come to the period of the Great French War. Again we will deal with the average annual figures, as this is the only way in which we can make a comparative study. Taking first the revenue from other sources than borrowing, we find that the excise taxes were most productive, then the customs and then the land and house duties. The stamp taxes first began to be of importance in the period following the American War. Dur- ing the second part of the Great French War the income tax assumed great importance, yielding almost as much as the customs. Now we come to the interesting and surprising phase of the situation. From the stress which has been put upon the growth of the debt it might be assumed that the greater part of the cost of the wars and of the growing expenses of all kinds had been obtained by mortgaging the future. As a matter of fact, just the reverse is true. Most surprising of all, the really stupendous expenses of the Napoleonic war — the second half of the Great French War period — were met chiefly from taxation, the exact percentages being 79.70 from taxation and 20.30 from borrowing. The table of Government income following, prepared to cover the same historical periods as in the case of the Ex- penditure table, may be studied with profit. t i4ol BANKERS TRUST COMPANY ill 1 m GOVERNMENT REVENUE 1 688-1 830 Average per Annum for Alternate Periods of War and Peace In Millions Sterling Period Character of Period Peace War Tax Tax Debt Total Tax Debt 1688-1697 1 698- 1 70 1 Wars of William III Peace . . . . Wars of Anne . . Peace .... Spanish-Austrian Wars .... Peace .... Seven Years War . £ ' 4,6' £ 3,6 £ 1,8 £ 5,4 or /o 66.43 % 33.56 1702-1714 5,4 2,3 77 1 ^r^ fr- 1715-1739 6,9 •»■ '^y-oo 30.40 1 740- 1 749 1 750- 1 755 1 756- 1 766 6,6 9,1 • • • • . 3,0 5,5 9,6 14,6 68.91 62.62 31-08 1767-1775 Peace .... American War 10,7 37.37 1 776- 1 785 12,7 9,4 22,1 57.39 42.61 1 786- 1 792 Peace .... 1st Period iFrench 2nd Period/ War Peace .... 17,0 68,0 I 793- I 802 1803-1817 1818-1830 26,2 64,4 20,9 16,4 47.1 80,8 55.60 79.70 44.40 20.30 " • ••••• Chapter XXII Peace and Social Betterment (1817-1914) WE have just been studying the finances of a period the dominating note in which was war. It was also the period when the greater part of the English debt, as it stood prior to the recent world cataclysm, was created. We now enter upon the study of a period where peace was dominant. During the century there were two important wars and a number of military expeditions, but as these were all fought at a distance, they scarcely interrupted the course of events at home. The period is one of intense interest to the social reformer, to the economist and to the publicist. For the student of public finance it is chiefly memorable as a time within which the methods of taxation were greatly simplified. A dis- tinguished succession of finance ministers, notably Peel, Disraeli and Gladstone, introduced and successfully estab- lished innovations in State finance of far-reaching importance. Sources of Revenue — Tariff Reform During this period England was transformed from a coun- try surrounded by high tariflF walls to one practising free trade in its most extreme form. From the standpoint of finance this resulted in reducing the number of classes of com- modities upon which customs duties were collected from 1200 in 1842 to 466 in 1853, and to only 48 in i860. By 1880 the number of classes of articles upon the tariff^ had been reduced to ten. In 1914 substantially the entire customs revenue was 141] 1 .1 ill! ifll m 'm\' 1 ^^ H 1^ ! i ill 142] BANKERS TRUST COMPANY derived, in the order named, from tobacco, tea and sugar and from spirits in various forms, including motor spirits; although cocoa and its preparations, and coffee, together yielded almost as much as spirits. Notwithstanding this radical change in the customs tariff, the revenue from this source remained fairly uniform during most of the period, but with a marked tendency to increase during and following the period of the Boer War. The income from the excise taxes steadily increased during the century. The remaining important sources of revenue were the income and property tax, the estate duties, and the stamp taxes. The income tax was discontinued at the close of the French Wars to be reimposed in 1843 and has been of growing importance ever since, finally becoming the most important source of tax revenue in the financing of the recent war. Character of Expenditure Turning now to the purposes for which the money of the State was expended during this century we face a situation of great interest. First of all we find that the expenditure for the payment of the interest upon the debt in the fiscal year ended March 31, 1914, was £24,500,000, a reduction of only £8,400,000 from the year 1817 when the maximum charge was reached, show- ing that no determined effort had been made during this long period of comparative peace to get rid of this burden. Military Expenditure In the next place, we discover that the military expendi- ture steadily grew during the entire period. The Crimean War cost £73 million, or at the rate of over £24 million a year for the three years (1854-185 7) affected by the ENGLISH PUBLIC FINANCE [143 financing of that war; but, eliminating this special feature^ we find the cost of the mihtary establishment in time of peace steadily mounting, until in the four years preceding the Boer War it averaged over £40 million; more than the average military expense during the Great French War, although some five million less than during the most expensive period of that war. The Boer War cost £281 million, bringing the entire military expense for the period (1899- 1903) up to £70 million a year. However, for the peace period of over ten years fol- lowing that war the military burden averaged annually over 50 per cent, higher than it had averaged in the four years preceding the war. In the fiscal year ended March 31, 1914 the military establishment cost over £77 million. Civil Government Expenditure Let us see, now, what the statistics of the cost of civil government show, eliminating after 1870 expenditures for postal services, because these were offset by a corresponding or greater income. We find that the record can be allocated roughly to three periods. Down to the time of the Crimean War (i 854-1 856) these expenditures called on the average for about nine million pounds a year, increasing during the last decade to about ten million. They then reached a new level, ranging from an average of about £12,500,000 during the period of the war to an average of slightly under £23 million during the five years of Gladstone's administration ending in 1874. Thereafter they mounted rapidly until in 1914 they had reached over £75 million or substantially the same as the military expenditure. They had run neck and neck with the military expenditure for the previous six years. The following table will visualize this last statement : V I f% ]\ w 144 1 BANKERS TRUST COMPANY CIVIL GOVERNMENT vs. MILITARY EXPENDITURE In Millions Sterling Years Ended *Civil Military March 31 £ £ ^909 49,7 59,0 ^910 55,7 63,0 191 1 60,9 67,8 ^912 67,4 70,5 1913 70,1 72,4 1914 75,2 77,2 •Postal expenses eliminated. The explanation of this steady increase in the cost of civil government is to be found in the awakening of the civic con- science to the duty of the State to its citizens. As we have already noted, in 1839 Parliament for the first time voted a small sum for public education. By 1854 ^he expenditure for this purpose reached £559,000 — twenty years later it was more than four times as great. In another twenty years the expenditure for this purpose had again quadrupled, while in 1914 it was over nineteen million pounds, twice the 1895 amount. To complete the record we may note that this sum had again doubled in the year ended March 31, 1920 and that the budget figure for the current year (1920-21) is £56 million. The introduction of old age pensions in 1908 and of health insurance in 191 1 added another simi ar amount to the annual expenditure by 1913-1914, and these expendi- tures tend to increase in almost a spectacular way. For example, in 1919, with scarcely a word of objection, old age pensions were increased by Parliament by an estimated annual sum of about £10 million, bringing up the estimated future annual expenditure for this purpose to about £28 million. The following table, giving the distribution of the civil government expenditure at the end of historical periods from 1833 to 1914 inclusive, offers further interesting data. W Pi P H t-H Q M X! w H Z w > o (J > U o u "IS u o 0^ 2" o (/) I CO 00 CO J2 *-• S ^ .2 O u O ENGLISH PUBLIC FINANCE 03 +-> O 0) o 03 C 0) 0) u y 3 W C Q* CL 3 0) U ^QC S a> _ a> o C3 en c o o c 2 > •5 «» o ij =5.9 S C !3 ''c^ <^ X 'P, ^u -i^ O U3 ,T3 en 3-P 5 ^^ C c3 Ji fl> 00 l^ rO •« 9^ •« CO CO ''d- »0 -^ CO •^ *» ^ 000 COCO o o 10 1^ o o 00 rt-»0 ■k «h Vh •-•WW rO •-• vO O^ *-• 00 •b •« ah ^ <^ 9h 10 ir> w CO CO o> M M rf CO t^ ON 00 r^ r^oo vo vo «i^ •« «k »« ^ v^ •i (S CO CO CI 00 00^ rCvc* '«*• rC CO 00 vO t^vO O 10 •k «h V^ «h ^ ^ rf W M W CO -^ CO GnOO 00 vO N O O »-• ON lOvO vO t^ CO »0 O O O O co^-i cOiO Th Tf M t>» CO rf 00 •-•CIIOGncOCn ON CO M vO 00 iC 0% •% •% *k *k w M 'i-vO CO CO "^ iTi 0\ "rt O 10 CO «h •» *» ^ *^ *^ »-••-• W W W -^ COMOO oO'-'t^l^cOcO 000 o*^^*^^^ 00 vo vO vO vO •-• « «> .k » » ^ l_l fl HH H4 •-• CO ,^ CO ri "^ . 00 00 00 C; »H M H4 cd CO t^ '^t'vO »0 CO rj- . vO t>»oO ON O •-' ^ 00 00 OC 00 ON On (J IM I.H |i^ H4 M 1-4 [14s o i •o a o o o o o o 00 t: o u ^ •-• d CO J3 9 1 T3 d CO d o I .S > o . n « 5 fi •a > Si ^ Qi — s ^^ at i^ •«« • S W.T3 O ^ o daq *© o ajj S ® ** « 3 o a » +-♦+ 146] BANKERS TRUST COMPANY ENGLISH PUBLIC FINANCE [147 !(P Therefore, to sum up, we find that the striking facts con- nected with public finance in the history of the century lying between the two great wars were these: A revision of the tariff and revenue laws to promote freedom of trade and to provide the means for great social reforms, a failure to bring about a radical reduction in the debt and a steady increase in military expenses, even during a prolonged period of an al- most complete absence of war. T>ebt — Refunding Since 1 81 7 several refunding operations have been carried through. The most important of these operations, and the only one to result in a saving commensurate with the effort, was that made by Mr. Goschen in 1888 and 1889 when some £565 million three per cents of various issues were refunded into 2^ per cent, consols at a saving of £1,411,000 a year. In accordance with the terms of issue the interest rate on these consols became 2^ percent, after 1903. These are the consols of today. Mr. Gladstone had previously endeavored, in 1853, to effect a somewhat similar operation but the conditions at the rime were unfavorable to the success of the undertaking. An operation undertaken in 1884 was likewise unsarisfactory in its final outcome, as it resulted in a saving of only £46,756 a year on some £22,362,000. Some Comparisons On January 5, 1817, the debt stood at £850 million. The fixed charge for interest and management at that time was about £32 million. In this amount was included the sum of about £2 million annuity payments. It has for many years been customary for Treasury officials in making statements of the debt to capitalize the annuity payments. This hardly seems a proper method for 1 817 as the annuities being paid at that period were really bonuses, or additional interest, and represented no expenditure of capital. However, if to agree with the Exchequer method of today we roughly calculate the capital value of the annuities outstanding in 18 17 at fifteen years purchase, or, say, £30 million, this would bring up the par value of the debt in 1817 to £880 million, equivalent to about £52 per head of population. In 1817 the national wealth was estimated to be £2,700 million, about £159 per capita. Therefore the national debt at that time was almost one third of the national wealth. In 1914 the national wealth was estimated at £14,500 mil- lion, say, £315 per capita. The debt, which was then £711 million, was thus less than 5 per cent, of the wealth. The fixed charge at the earlier date was 8 per cent of the estimated national incomeof £400 million, while at the latter date it was only a trifle over one per cent, of the estimated national income of £2,250 million. Therefore the growth in population, in wealth and in earning power had made the burdensome debt of 1817 a very unimportant affair by 1914. Again, the expenditures of the Government for all pur- poses amounted ini8i7 to £71 million, about 18 per cent, of the national income; in 1914 the expenditures of the Gov- ernment had risen to £212 million but this amount was not quite 9^ per cent, of the estimated national income. Casting these figures into tabular form we arrive at the following statement. It should be borne in mind that national income is the estimated income of the British people as a whole, not the revenue of the Exchequer. This latter would be substantially the same as the Government expenditure. «l t< . u^ If , 'V- 1 1 ( i«|i w m 148] BANKERS TRUST COMPANY THE FISCAL CHANGES OF A CENTURY Grand Totals, Expressed in Millions Italics indicate decreases Date Popl. Natl. Wealth Debt Debt Charge Natl. Income Gov't Expend. Jan. 1817 Aug. 1914 17 46 2,700 14,500 850 711 32 24 400 2,250 71 212 Changes 29 11,800 IJQ 8 1,850 141 Stated Per Capita and Percentage Date Natl. Wealth Debt Natl. In- come Debt Charges Gov't Expenditure Per Cap. Per Cap. % Wealth Per Cap. Per Cap. % Income Per Cap. % Nat'l Income Jan. 1817 Aug. 1914 £ 159 315 £ 50 15 31.5 4.9 £ s 23 II 49 - £ s I 17 10 8.0 10.6 £ s 4 4 4 7 18.0 9.4 Changes 156 3S 26.6 25 9 I 7 2.6 3 8.6 In words of Sir Stafford H. Northcote, writing in 1862, the great advance of the British nation from 1 81 7 to 1 914 may be summed up as due "to the progress of science, and its appli- cation to all the arts of life, the development of the railway system, the improvements in agriculture and manufactures, the discoveries of gold and the impulse given to colonization." To these general causes he added the great improvement ENGLISH PUBLIC FINANCE [149 which had taken place in the fiscal administration. Since the time when he wrote has come the age of electricity with the wonderful impulse which it has given to the arts and sciences, especially as applied to the material well-being of the nation; the tremendous advance in transportation methods, on land and sea and now in the air; the intensive methods of produc- tion; improvements in finance and, as an impressive result of the recent war, the welding together of the constituent political units of which the Empire is composed into a unified whole, one nation in sentiment and purpose composed of many separate political units. The history of public finance in England during the crucial period of the World War has already been related. m ff ENGLISH PUBLIC FINANCE tisi i Ji I i m Chapter XXIII The Ancient Exchequer ^HERE is every evidence that the early kings had in -^ use well developed methods of administering their fi- nances. TAe Exchequer The Exchequer was the place where the King's revenue was received, where it was kept, supervised and controlled and from whence it was issued. There were three officers of the Exchequer, each of whom had control over the issue of the money. The money was kept in chests, each chest having three locks and each of these officers having his key to one of the locks. One of these officers called the Teller, was the qashier who received the money; then there was the Clerk of the Pells, who recorded on a pell or parchment all receipts and issues; finally there was the Auditor, who examined the records and whose duty it was to see that no money was issued except in accordance with the law, and with the sanc- tion of Parliament. This system existed until well into the nineteenth century, although certain changes were of course made in respect to the actual custody of the cash. In 1834 the whole system for the administration of the public finances was revised and modernized. TAe Accounting The King's revenues were collected by the i?herifFs and by them were twice a year, at Easter and at Michaelmas (the day after the feast of St. Michaels, about the end of Sep- tember) paid to the King's treasury. 150] On the appointed day the sheriffs would bring their ac- counts and the money which they had collected to the hall in which the settlements were to be made, known as the Re- ceipt of the Exchequer. Upon entering the hall the Sheriff would see at the farther end a table, about ten feet in length and five in breadth, covered with a black cloth which was divided by white lines into squares about a handbreadth in width. It was this chequered cloth which gave name at once to the system of accounting and to the place of meeting and which persists to this day as the designation of the English treasury. Seated on a bench to the right of the table clothed in their scarlet robes, the Sheriff would see the Bishop, the Justiciar who represented the King, and the Chancellor of the Excheq- uer; also the Constable and several Chamberlains or cour- tiers. Seated at the far side of the table were the Treasurer and the scribes or clerks. Facing them were the calculator and the cutter of tallies. Seated on benches arranged around the room were the taxpayers, watching to see that the ac- counts as they affected their interests were correctly stated. The SheriiF upon approaching the table would place on it his receipt tallies and the silver coins for use in settling his ac- count. He would then take his place at the foot of the table facing the Chancellor and other dignitaries. The game of chess which was to decide his indebtedness then proceeded. In the early days only the priests and monks were able to read and write; therefore the accounting had to be visualized. To serve as counters foreign coins were used. The calculator would place the coins in the proper spaces on the chequered cloth to represent the Sheriff's indebtedness. Below he would place the silver paid in by the Sheriff and counters represent- ing any credits due him. Thus was visualized the state of \i\ k\ tT -'■ 152 1 BANKERS TRUST COMPANY ENGLISH PUBLIC FINANCE flS3 i\i^f II the account, and the adjustments required to effect a settle- ment could be readily determined. The Chancellor's scribes meanwhile had entered a statement of the account in dupli- cate on the rolls of vellum which were used in place of the paper account books of to-day. A tally — receipt — prepared by the tally cutter would be given to the Sheriff to be care- fully preserved until the next settlement. Tallies These tallies were sticks of some hard wood on one side of which notches were cutof peculiar shapes and sizes correspond- ing to the figures of account which they represented. The stick was bored near one end so that it could be filed upon a rod. When the sums paid had been cut on the two edges of the stick, and the name had been recorded, it was split nearly to the bottom, so that one part contained a stump or handle while the other was only a flat strip. The larger part or tally was retained by the Sheriff, while the smaller part remained in the Treasury. This was known as the counter-tally or counter-foil. As it was customary for the Sheriff to make only a partial settlement at Easter, it was necessary for him to bring with him at Michaelmas his Easter tallies in order that he might obtain the necessary credits in making his set- tlement for the year. The validity of the tallies presented could be determined by comparing them with the counter- foil. The use of tallies at the Exchequer was not finally discontinued until 1834. On the loth of October of that year we read in the GentlemarCs Magazine that the most ancient revenue department in the State, the Receipt of the Excheq- uer, terminated; also that on the i6th the tallies were burned, and on the same day the houses of Parliament were destroyed by fire. The presumption was that the flues were overheated on account of the great fire caused by the burning tallies. The use of tallies has left a permanent imprint upon Eng- lish language and usages. The larger part of the tally was sometimes called the stock and the smaller part the foil. Down to about a hundred years ago, if one lent money to the Bank of England or to the Exchequer, tallies were cut for the amount; the bank kept the foil and the creditor received the stock. He thus held "bank stock" or "Exchequer stock'* of the amount recorded upon the tally. When the form of cheque was adopted it is true that it was not called a foil, but the part retained by the payer was called the counter-foil and the word "cheque" itself goes back ultimately to the same root as "Exchequer. >> The Ancient Treasury The taxes in the early days were frequently paid in kind, as well as in money. The wealth of the King and of his nobles, not in the form of landed property, forests, flocks, herds and the like was represented not alone by money but by gold and silver plate, by jewels and gems and by richly embroidered robes. Such articles belonging to the King were kept in his Treasury. For a long time, wherever the King went the Treasury also went. The principal treasuries ultimately came to be located at Winchester and at Westminster and finally with the growing importance of London the Treasury was definitely located there. It would be interesting to consider here the methods of administering the Treasury in the early days and the duties of the officials. However, it is impossible to do this in the space at our disposal. Therefore we will proceed at once to an examination of the system now in use. ff i l*^ Chapter XXIV The Modern Fiscal System npHE finances of Great Britain are conducted on what is -*• known as the budgetary plan. Briefly stated, this plan involves the preparation by the executive of a "definite plan or proposal for financing the business of a future period both with respect to revenues and expenditures." T/ie Budget The policy of the English budget is settled by the Chan- cellor of the Exchequer and the details worked out by the permanent staflF of the Treasury. The budget is presented by the Chancellor to the Commons usually in April or May. Sometimes a supplementary budget is presented in the Autumn. Previous to the presentation of the budget a financial statement containing carefully prepared estimates of revenue and expendi^re is placed in the hands of each member of Parliament. These estimates are compared with the actual expenditure for the past year, also with the esti- mates for that year. At the time of presentation the Chan- cellor explains, — usually in great detail — the reasons for the proposed expenditures and especially for the proposed methods of taxation or borrowing to be followed in obtain- ing the revenues necessary with which to meet the expendi- tures. Many of the budget speeches have been notable for their lucidity and interest. Gladstone's budget speeches were among his greatest eflForts. Parliament can approve or reject the recommendations of the budget but does not add to its 154 1 ENGLISH PUBLIC FINANCE [ISS items or make an appropriation in excess of the amount proposed. Certain appropriations are of a continuing or permanent character, such as those for the support of the King and his household; the interest and management of the public debt; the salaries for the higher judicial officers and the regular annual expense of the military establishment. These are designated as "Consolidated Fund Services." Annual appro- priations for the other public expenses are known as the "Supply Services." Appropriations for such services cannot be made *' unless recommended from the Crown." That is, unless set forth in the budget. This puts an effective check on log-rolling and trading and upon ill-considered expendi- tures. So carefully are the estimates of expenditures and receipts made that in normal times the actual results vary but slightly therefrom. The Exchequer — /. e. The Public Treasury The Treasury Department controls all financial operations of the Government which in any manner affect the amount of funds that Parliament will be called upon to vote for their support or the expenditure of funds when granted. Though termed a department the Treasury is technically a board. Prior to 1714 the head of the department was known as the Lord High Treasurer. In that year the office was put in commission; that is, while the office remained a single one provision was made that its duties should be performed by a board consisting of a First Lord of the Treasury and three Junior Lords. Though this board has continued in existence until the present time all real authority has in fact passed from its hands into those of the Chancellor of the Exchequer. n^^'^-'^""'-* '"■■" -■"■--'■'-"■ ,r '^ 156 1 BANKERS TRUST COMPANY ENGLISH PUBLIC FINANCE [157 s\m I The position of the First Lord of the Treasury is usually held by the Prime Minister, but whether this is so or not this oflSicer does not concern himself with the actual management of the affairs of the department of which he is nominally the chief officer. The three Junior Lords have certain minor duties in connection with the Treasury, but their real duties consist in acting as assistants to the Parliamentary Secretary of the Treasury, who is often designated as the chief whip of the Government in the House of Commons. Thus the officers nominally in charge of the Treasury in fact pay little or no attention to the direction of the affairs of that department, but concern themselves almost entirely with parliamentary matters. The Chancellor of the Exchequer and His Aids TTie real responsible head of the Treasury is the Chan- cellor of the Exchequer. He is assisted on the parliamentary side by a parliamentary or patronage secretary and by the three Junior Lords of the Treasury. On the administrative side, he has as his chief assistants two officers, one known as Permanent Secretary to the Treasury and the other as Per- manent Financial Secretary. These officers do not leave office when a change in administration takes place. The former performs the duties of administrative head of the department; the latter has immediate charge of the duties of the department relating to the exercise of its powers of financial control over the other services. To enable him to perform his duties the Financial Secretary has a large staff of clerks. The Treasury consists of seven divisions with a principal clerk at the head. Among these divisions is distributed the work of all the departments of State. For instance, one has the Army, the Navy and the Colonial office; another, the legal departments and the Home Office; and so on. All the departments of State have their work distributed to a division of the Treasury and every paper relating to a de- partment goes to the division which has to deal with that department of State. Therefore these principal clerks at the head of the seven divisions are the people who consider the general questions of expenditure, economy, and efficiency in the departments of State which relate to their division. They are the real people who all through the year and changes of administration are considering all the topics that fall to the work of their respective divisions. The Consolidated Fund In 1787 Parliament provided that there would be one general fund into which all the revenues of the Crown should be put and from which all disbursements should be made. Prior to this time it had been customary to allocate certain definite charges against each of the principal sources of revenue. It is stated that in 1785 there were no fewer than 74 charges involving 74 separate accounts imposed upon the customs revenue, while the militia charges were defrayed from the land tax and certain hereditary annuities were met out of the post office revenues. To correct this situation the "Consolidated Fund Act*' was passed. A similar act was passed in 18 16 in reference to revenues and expenditures of Ireland and the two consolidated funds were further consoli- dated into one consolidated fund for Great Britain and Ireland. The Consolidated Fund stands to the credit of the Exchequer, that is, of the public treasury. IS8] BANKERS TRUST COMPANY ENGLISH PUBLIC FINANCE [IS9 i' < i : i»- The Bank of England and the Treasury The custodians of this account are the Bank of England and the Bank of Ireland. Thus these banks are substituted for the "strong box/* or chest, of the old Exchequer for the keeping of the public treasure. The duty of the banks is confined to receiving the public revenue and paying it out to officers who are charged with the actual responsibility of settling and paying public obligations. These officers take the place of the Teller under the old cashbox system. The centralization of all public payments in London and the direct hold of the Bank on the process of payment lend an importance to the central organization of public financial administration in England such as it possesses in no other country. Through the medium of the Bank public revenues, without being collected in provincial treasuries, are trans- mitted direct by the Receivers of Taxes to London, after local expenses have been met. The Bank of England thus actually receives the surplus cash of all the revenue departments. The greater part of the Government expenditures is paid in London itself. Expenditures which have to be met outside of London and which cannot be paid by the receivers from their collections are always remitted from London. This keeps the management of the money in the hands of the cen- tral authorities. Each of the head offices concerned with the administra- tion of the various branches of the revenue has an account at the Bank. All the money received by these offices is in the first instance credited to one of these accounts. Only mis- cellaneous receipts which are managed by the Treasury are paid direct to the Exchequer account. Revenues received by the collectors in the provinces are remitted to London by means of bills of exchange which are made out to the head office to which payment is to be made. Should there be a branch of the Bank of England in the neighborhood of the collector he deposits his money there, and the amount is at once credited to the general account of the Commissioners of Inland Revenue in the books of the Bank, but as the Bank has only flight branches remittances are more usual. The bills run for two or three days and are sent to the Bank by the Commissioners of Inland Revenue to be cashed. When they have been honored the Bank credits the account of the office with the amount in question. The Bank of Ireland acts for account of the Exchequer in Ireland while in Scotland the six principal banks act in turn in this capacity, as agent for the Bank of England. The Government account has been kept by the Bank of England since 1834 under the name of *'The Account of His Majesty's Exchequer." Into this account all the public revenues are paid as soon as possible after their collection and from it all disbursements are made. The Exchequer account is not the account of a distinct central treasury as opposed to various other treasuries. It is the repository for all public moneys. The Paymaster General The English system of disbursing public funds rests upon the principle of having a single Paymaster General for the whole Government. He receives the money from the Exchequer that is required for the payment of public obli- gations and makes such payments himself or advances money to "sub-accountants** for that purpose. "Sub-accountants" are defined by the Exchequer and Audit Departments Act as t In the provinces. I tit* m rr-l i6o] BANKERS TRUST COMPANY ENGLISH PUBLIC FINANCE [i6i *»»' t 'those who receive advances by way of imprests from prin- cipal accountants or who receive fees or other public moneys through other channels/' The Paymaster General is in no sense an accounting officer. He has nothing to do with the examination and settlement of claims. His sole function is that of making payment of orders drawn upon him by ac- counting officers proper. His responsibility is limited to that of satisfying himself that the orders for payment are in due form and are supported by the proper documents as required by law. Originally there were a number of paymasters, one for the army, one for the navy and a number for the several civil services. During the years 1830-1856 these were abolished and their duties consolidated in the single office of Paymaster General. A special feature of this system is that although the Paymaster General keeps a separate account in respect to each vote for the civil services and a separate consolidated account with each of the departments of the army and navy, he keeps but one general balance from which he makes pay- ments on account of all the votes. This means that so long as he has a sufficient balance he can pay any order drawn upon him regardless of the vote to which it relates whether he has requisitioned sufficient funds on account of that vote or not. Any payment on account of a vote in excess of a sum requisitioned for that vote is subsequently adjusted by a future requisition. Accounting Officers As we have seen, the duty of the Paymaster General is that of paying obligations found to be due. It is for the accounting officers to determine what payments are so due and payable. Technically an accounting officer is the officer charged with the duty and responsibility for the expenditure of a vote and of rendering an account of the manner in which the duty is performed. An accounting officer is designated for each vote. Theo- retically there might be as many accounting officers as there are votes. The same person is usually made the accounting officer for all the votes for a department or other important branch of the public service. The duty of rendering an account of the manner in which funds are expended is a part only of the duties of this officer. He is also charged with the supervision and control of all the financial operations of the department to which he is attached. He is the officer whose approval is required before any expenditure of funds can be made or liability entered into. The accounting officer has entire charge of the financial operations of his service. He is responsible for all expenditures and the rendition of the accounts. His duties pertain not only to the settling of ac- counts but to the incurring of obligations in the first instance. He has the duty of seeing not only that the law is strictly complied with but that all expenditures are made to the best possible advantage. In a word he is the watch dog of his service and the permanent financial secretary of his depart- ment. There is a complete and thorough system of audit. Financial Reports Various financial reports are submitted annually to Par- liament. The principal report, known as Finance Accounts^ dates from 1802 and has not changed its essential character since its first issue. The accounts are made up for the fiscal i I62] BANKERS TRUST COMPANY t t i*- m year which terminates on March 31 and are laid before Parlia- ment on or before June 30th of each year. Finance Accounts also contains a statement in considerable detail in regard to the national debt. Note. — The principal dependence for the statements made in this chapter has been placed upon a report on The System of Financial Administration of Great J5n/a»n, made \?7^*iV x?r^ «r.S^^*^Hl^ ^^^ Government Research, by Professors William F. Willoughby. Westel W. Willoughby and Samuel McCune Lindsay, and upon the History of the Bank of England and its Financial Services to the State, by Eugene Von Philippovich. ■ 1 he word vote which frequently occurs in the chapter is used in a sense equiva- lent to our term "appropriation," while the word "issue" is equivalent in our usage "O pay. Chapter XXV Concluding Thought and Deductions WE have now traced the history of English public finance from the time of the accession of William III down to the present day. We have found that with relatively unimportant exceptions the debt has arisen from the extra- ordinary expenses of the various wars in which the nation has been engaged. We have seen that the cost of war has progressively increased and that after each war all expenses of the State have risen to a new level. We have found little disposition to reduce debt during the intervals of peace. However, we have found that the growth of the nation in material resources has reduced in each historical period the burden of the debt. We have learned that the English financiers have always derived a substantial portion of the cost of each war period from taxation. Turning to the revenue from taxation, we discover that the most flexible source of taxation has proved to be the income tax. The finance ministers since that form of taxation was introduced, have found it comparatively easy to meet the requirements of a new situation by slightly or largely raising or lowering the rate of this tax. It is no longer neces- sary to hunt up fantastic sources of income, such as taxation of bachelors, hearth taxes, window taxes and the like. Again, so far as the customs are concerned, it has been learned that much better results can be obtained from a moderate tax on a few articles of common use than by taxing many articles. This simplifies administration and reduces the cost of col- lecting the taxes. 1 163 i64l BANKERS TRUST COMPANY ENGLISH PUBLIC FINANCE [165 ■ il c o CO u o a 00 ^^ 00 ci i-i o 8 ON 10 M ON < o t3 o W o •^^ o\ PC4 o U CO .S S^ >^ s C/D o 2 «^ o O ^ 00 i^ CO ' — ' ^ to CI U« 5*S ^jS .*. *^ ^ 1 ^ *1 9. 'l'^ 11 *t°^ Q t^ O PO 0*00 aoo fO r* fO novo Tfef O>00«# 00 ^t^t^TfoO rOfOO « TfwjujoOvO l^rj-iooo O 00 O t^^ m lAjfcT M M M CO Ci t»00 10 100000 t^OO Ok OkO OlO M t^fe* O MiH 00 CO oj N t^ w 5t>q fo fo oj t^oq c^ "2*^ oj a a o oo*-i rooo^ OOOMWMMNTt rj-od »0 fO POOO 00 lO lO m v© »n>0 00 O >0 ci O PO ^00 rooo »^ t *^ I *^^.«l '^ »^ 1 '^ 1 « t* '^'OvO 00^ O 00 M MMc«MOvotoiou)v> t^>o tioo Ok a olS o o 5 M0» ClOM O Tf O TtTf * * » too o fOOv O M PO « ^ O I^IO t^ r6«0 PO^ C4 0» 00 PO«-l M Pooo fooo "2 q PO M u2>q « po n n ro m oj n-oo o o f^ ©« po o o « r*5 CO »o »o t- 1- o M io« » a M « 00 0| « avo M d; 4 M 00*00" aef M M M M rovO vanvufi t^>o »>.oo 00 o^o o 0\ foJI •-•*H •-• POP T9 wt'?'^'::*t<^^«^«^'?fl»^t *::^. poMoooN-^jiTtoo OOOOOOOOOOOMCOOMMMM^iOTfN rOM 4o » ^ 0t<0 00 M^ |a 2 s o o =•§1 s wro^NWN^qioaiij a 1^00 OOOMCIMMcfpJ'ci O* tJiO lo C>« 10 M^ M 8 rt'2 ■ « o) a 00 t>. M ^ Ov O* »0>0 iO 10 P« 00 0>0 M rOTfu^vO t^oo OnO M rorfrtu^irjO r-oo oO S O S m SS QP4 2^ V o o CO CO a cd o ♦J « 0) o 0) u 6 > I J3 •3 rf-O • • o M^ mQ '5 00 M m ^ u ^ 00 Z CO 4) ^ JS.S2J2 o ^^ *3 W) (d Im cd 03 M PO lO 00 M XI 2 d 08 N Ok M bO 3 2 Ok a 00 3 d As to the purposes for which national taxes are raised, we find that outside of the cost of wars, the maintenance of the military establishment in times of peace and the public debt burden, other expenses are relatively small. Therefore, if a way could be discovered to end wars and to pay off the debt, the people of Great Britain thereafter need scarcely feel the burden of taxation for other purposes, that is, unless it seemed wise to undertake enlarged plans for social better- ment. As to such undertakings, we have found that since the widening of the suffrage there has been a growing ten- dency toward social betterment through State co-operation, and that when the war broke over the world in 1914 there were then pending plans which would have involved further heavy expenditures for such purposes, and that notwithstand- ing the heavy financial burdens of the war there has been during the war period an increasing expenditure for educa- tion, for old age pensions, and for similar purposes. From the point of view of the investor, especially of the foreign investor, we find that since the Revolution of 1688 England has scrupulously kept her engagements with the public creditor, that she has done so in times of stress and that her burdens to-day, while heavy, are not much heavier, in proportion to national wealth and income, than those which she has borne at times in the past. Recent statistics of her commerce show that the country, even in the unsettled year 1919, has quietly been forging ahead again. While we expect to vie with her in a generous rivalry for business, we cannot but be cognizant of the fact that her long experience in the shipping trade, extending over the centuries from the time of Drake's famous voyages in the days of Queen Elizabeth, give her a peculiar advantage in this line. The experience of her bankers and manufacturers is an asset of incalculable value. i !1 '!■ .i' i66] BANKERS TRUST COMPANY *^ 2 On. 2 i-i U vo C U.9 k^ 1-4 O M ON I ON 0^ o O CO 60 < '^ V0.2 H ^ o ♦-» 5s On Offi ^ 2 00 ill i::^ N OQ Q cd o %; OB u WHO « r* O t* '♦M POM «t^po«MO • • • • M M M M M M M o o o o o o 4-» CO Xi M MMMMMM M ro fO OkOO fO « o» t^ 0\ r* M M M M (4 M too N M O Ok TfiO f*> fO PO w 0»0 Tt« oo o> W « N W « »-• M C4 ©Tfroi^roOvTti-tOvWO WOmoOi-iO M 00 toco 00 O »0 fO t^ "^00 M M M M ^O O OvO PO O »O00 Tf W O 1OQ0 t^OOOO 00 00 O^NO O O fO • »»»»»* \0 O M O P4 ooo ro O t^ t^ ^»0 0\ 00 00 r*t>. t^>o t^ CO M H O t^ t^ C» «nio M t^ t^oo «^o 00 ^ 8 o» M cs O NO ►-' r~oO 0\ 00 ^ rC r^ -^too ro po O ci" M H M root t^ O f^ O 00 0» ^loioodvO r* t>.00 lO lOvOO 00 fo t^ f^ POO •^o* Ok ^"^J Tf looo O 00 O r^^w »ot» 00 C^OO Ok Ok O O lO M t^fe* POiOO M»otO00 "«fO « CO wj r^ i^ "^ lo apo4po<^'. r*) Tf P« vO POO ^ ^ rj^d« 00 t« t^ rO i/>vO O O O OkO» O ttf 0/ o oo N oo »-j^ po pooq 1^ « t^ POO »o ci t^ o M looo M M M M H TflOO PO t^ *♦ • • » » * * lO M o rf r>- fO O t^ lOiOiOO M o POM r^roooio tooeik OOO M l^N tO^ MOOO t^O oOOOOkOkO'^OotO Qd H H M d H ^roO PO tooO to M d rf totO O t^ to to to to M N ^Tft^NOOO toOO O r*0 ^f^ rJ-O^ Mooo t^O t^OO OvOkO^ 0(0 N0» CfOM "MMfocffON^^ddk C^ O PO t^ PO M d cioo doooo M fOCI « N N 00 M !»• r>. !>. o P|W to O O 00 >dvd 00 PO to t>^t» ^eiv^ NCIdCIMCiCI^M fOP lO POO O O to O N to rJ-O OkOOO O M 00 « Ok PO cs 00 O O ^ PO to© N O lO mO M « «00 PO ^PO ^to t^OO POtOOO M PO W M M M M ^ to Tf O O to O ^ t^O fr* ro««c««pooe««^ 'tip MIO MIO ^ > e c •- o C Si O Ok r^ N O O O M O M O OOOOO O •» M M • M M M M M « Ok PO to Tf PO ^t r-ooo OkO M M PO M i^o a M« 00 q o POto to d pi PO powTdooo H M d CI ^POt^C* OkOO^ — ^ Ok ic5^ 00 r^ M Tt Ok Ok too 1^ to CI CJ r* ro M r* ^M r^ »>• rfOO to fO^ ^OO 00 Ok O M PO TftoO «^00 Ok,-0 M POTfrftO PO tOO t^OOOO OkOvH m c«e t-H a 4> 4> . . O rt • 0,8.2 .pEis *j £ o 2 § u S u SI w; § i4 iTtj o.S? "IS tj.2 ^.2 o «3'§ 2— «5 o '^ o;3 oP5 dJ CO )S OQ V Jo-og-og ^ii2.2^o CO v!>'C 8 O S^"2» !3 5SSg.a >«><>* CO U Q a 6 3 o U bO eS .4 U •a 3 o ENGLISH PUBLIC FINANCE [167 Her loyal overseas citizens, the peoples of her self-governing Dominions, Crown Colonies and Dependencies are a bulwark of strength and afford a wonderful home market, which it will be surprising not to see specially developed hereafter. What England requires to-day to insure her material well being is a heavy output of goods and services which the world will take in exchange for the food which she must buy in order to maintain her population and for the raw materials of man- ufacture, most of which she must seek without her own bor- ders. If class distinctions are forgotten in a general effort for the common welfare — in short, if the Golden Rule of doing as you would be done by is made the rule of action for conservatives and liberals, for labor and for capital, there need be no fear but that England will maintain a strong and wholesome na- tional life, that prosperity and happiness will be hers and that the wonderful credit standing which she has enjoyed for many generations will be maintained and strengthened in coming years. The tables printed on pages 164 and 166 summarize the statistical data for the entire period from 1688 to 1920. They have been compiled with great care and will be found worthy of study. li i The Bank of England \\W-^ nlifti Chapter I A Banking Evolution ^ I ^HE Bank of England is more than a corporation. It is a A personality. The first of the modern banks, if a bank two and a quarter centuries old may be so called, it is also the most powerful. This standing does not come because of its resources, for even its large capital and surplus of £17,- 800,000 are exceeded or closely approached by those of sev- eral of the London joint-stock banks, which also have greater total resources. The Federal Reserve Banks of the United States have combined capitals and surpluses nearly double those of the Bank of England, and gold holdings nearly five times as large. Nevertheless the Bank of England has a prestige and a standing which is all its own, won by years of honorable and capable administration of the finances of the world's greatest money capital. T/ie Functions of the Bank The Bank of England while privately owned performs all of the functions of a State bank. It also conducts a general banking business, receiving the deposit accounts of corpora- tions and of individuals. From 1844 until 1914 it possessed practically the sole right of note issue in England, but the Treasury, or currency, 1169 i jl» ^.^B • ^H siitt'^ilU^ta » ^^B mi^^iB - m w^m 'T^^ il^^B - M 'X ■iii!' • ] ' 'mI' 170] BANKERS TRUST COMPANY notes now in circulation greatly exceed the combined circu- lation of the Bank of England and of the Scotch and Irish banks. The functions of the Bank in connection with the Excheq- uer described in another chapter are of great importance. The prerogative of the Bank, which has accrued to it by a process of evolution, of holding the ultimate reserve for the banking and commercial interests of the United Kingdom is, in normal times, what gives the Bank its premier position among English financial institutions. The other distinctive purpose which it serves, especially in times of national stress, is by the alchemy of credit to liquefy the assets of the Kingdom and put them to work for its preservation and advancement Holds Ultimate Banking Reserves of Nation As to the first of these functions, that of holding the ultimate banking reserve of the Kingdom, it has come to be an axiom of the Englishman's financial creed that as the Government is back of the Bank it cannot fail. Therefore, it is argued, there is no reason why the other banks should carry any important reserve other than their deposit with the Bank, although some of the joint-stock banks in recent years have adopted the policy of carrying a substantial amount of gold in their own vaults. The amount so held in July, 191 8, was estimated by the "Committee on Currency and Foreign Exchanges after the War," of which Lord CunlifFe was Chair- man, at £40,000,000. The Scotch and Irish banks, as ex- plained in the previous chapter, also carry cash balances which may include a certain amount of specie. Except as to the gold so held the banking business of Great Britain, with its world-wide ramifications, depends upon the strength of ENGLISH PUBLIC FINANCE [171 the Bank and the wisdom of the management, and in con- sequence the commercial credits of the world also may be said to rest largely on the same foundation. At least such was the case until August i, 1914. The raising of the Bank's rate usually would automatically turn the exchanges in favor of London. The lowering of the rate would make for "easy money" throughout the world. Not only so, but the volume of the business which could be done, even in remote parts of the world, was determined by the attitude of the Bank. This delicate credit stiucture with its world-wide relations is now partly dislocated as a result of the war and will not properly function again until England returns to a specie basis. Mobilizes National Credit Resources The other special function served by the Bank is that of mobilizing the financial resources of the people for great financial and commercial emergencies and especially for meeting the needs of the Government in time of war. This is accomplished because of the fact that the ultimate banking reserve of the nation carried with the Bank can be made the basis, on occasion, for a great expansion of credit. It is the modern development of our forefathers' idea of a "fund of credit." The reserve of the joint-stock and private banks deposited with the Bank has come to be considered a basis for an extension of credits to their borrowing customers. As a result of long experience, it is found that a given reserve is sufficient to warrant the granting of credits for several times its amount. This principle is well known to bankers and constantly observed in their transactions. IMii Chapter II The Genesis of Banking TT will be of interest, before taking up the history of the -^ Bank of England and discussing its functions more in detail, briefly to consider the evolutionary process which led up to conditions making this bank a possibility. Banking Originated in Italy The enterprise of the medieval Italian merchants carried them to all parts of the known world. It was natural, there- fore, that the Popes should commission them to collect their revenues and to transport them to Rome. As these revenues were paid in the moneys of the countries where collected, the merchants readily became money changers and early origi- nated and used letters of credit and bills of exchange. It was in keeping with their other activities to act as collectors and farmers of the revenues of the sovereigns of the countries which they visited. As farmers of the revenues they would make advances to the King and reimburse themselves, with a profit, by collecting the customs or some other branch of the King's revenue, which was given to them in " ferme" — that is, as security. From such advances against the rev- enues it was an easy step to making direct loans. Some- times the repayment of these loans was guaranteed by the pledge of the Crown jewels, the royal wardrobe, or the very diadem itself. As the payment of interest ("usury'*) was forbidden by the Church, the merchants were rewarded for these advances in various indirect ways. Sometimes the King agreed to buy jewels or other wares. Sometimes he 172] ENGLISH PUBLIC FINANCE [173 granted trading concessions, or used his influence in behalf of the merchants with other potentates. Sometimes he made the merchants a substantial cash present for the use of the money beyond the time originally agreed upon for its re- payment. The necessities for ready money by those taking part in the crusades gave the Italians special opportunities for mak- ing gain from conversions of properties of various kinds into liquid funds. The Italian Bankers and the Plantagenet Kings of England The Plantagenet kings of England from the time of Henry II through the reign of Edward III — that is, over a period of more than two hundred years, from the middle of the twelfth century to well into the fourteenth century — were active pa- trons of the Italian merchant bankers. The archives of Old England contain copies of contracts between the Crown and the merchants dating from as far back as the reign of King John. Following is a translation from the Latin of such a con- tract, which must have been entered into during 1199, the first year of John's reign. It refers to the payment of a debt incurred by Richard I, presumably in connection with his crusade. Note in the last paragraph the promise of the King, " by way of thanks for your generous waiting * * * your waiting shall not seem burdensome to you.^ i9 DEBENTURE OF THE REIGN OF JOHN John, by the grace of God King, etc. ... to his beloved friends Speren, Barageton and their associate merchants of Placentia (i. e. Piacenza), greeting. Know that we wish to pay to you two thousand marks and 125 marks, which, for love of the dear memory of King Richard, 1^ 1741 BANKERS TRUST COMPANY ENGLISH PUBLIC FINANCE [I7S j I nPvi lft> ii In 1 i 1 1 ■If Ii' our brother and in accordance with his own request you lent to William Andegavensis (i. e. of Anjou) and R. Bangorensis, bishops, and to Stephen Ridel, for carrying out the business of our dearest grandson, the illustrious King Otho, in the Senate of Rome. And therefore, by these presents, we bind ourselves to you for such an amount, promising that on the next Feast of St. Michael after our coronation, at our exchequer in Eng- land, we shall cause to be paid to you, or to your known envoy, upon his bringing and presenting these presents, 625 marks, and at the Easter next following 500 marks in the same place, and at the following Feast of St. Michael 500 marks at the same place and likewise 500 marks at the next following Easter we shall cause to be paid at our exchequer in England to you or to your known envoy upon presentation of this our note of indebtedness. And nevertheless by way of thanks for your generous waiting we shall reply to you, the Lord favoring, that your waiting shall not seem burdensome to you. Witness my hand at Rothomagum, the 25th day of August. (1199 A. D.) Following IS a letter of credit dating from the second year of the same reign. This also is translated from the Latin. LETTER OF CREDIT OF THE REIGN OF JOHN John, by the Grace of God ... to all merchants, etc. Know, all of your body, that we do appoint the bearers of these presents, Hugo of Feritas and Robert of Sablenc, to prosecute our business at the Senate of Rome, and to merchants from whom they shall have borrowed money up to 500 marks sil- ver, for prosecuting this business, we shall be held bound to pay the money in full. And by these presents we are constitute principal debtors for this amount and, the term agreed upon, in accordance with the convention made between our afore- named clerks and the merchants. To those who shall bring these presents to us or to our mandatory along with letters from the aforenamed clerks showing the sum of money bor- rowed from the protestants we shall cause the money to be paid in full. Witness my hand at Fissa, the 6th day of January. (1201 A. D.) The transactions with the Italians ended disastrously for them and disgracefully for Edward III, when, because of his failure to meet his obligations to them, the great Florentine houses, known as the Bardi and the Peruzzi, were unable to meet their commercial engagements, and finally became bank- rupt. TAe Kings Factor Dating from the reign of Edward III we find the kings of England having dealings with English merchants. The king's factor (financial agent — banker) held an honorable position at court. He was charged with the arduous duty of keeping the king's coflFers filled. One of the first merchants to hold this position was William de la Pole of Hull, who in 1338 and 1339 lent Edward III what for those times were immense sums of money. He not only freely supplied the King from his own resources, but in order to secure additional sums kom others, he even mortgaged his own real estate. He is styled in all public instruments "our faithful and well beloved merchant.'' Passing by others worthy of mention, we find, about two hundred years later, Sir Thomas Gresham acting a$ royal agent or factor for Edward VI and later for each of his sisters, Queen Mary and Queen Elizabeth. Just as De la Pole arranged loans at Antwerp for Edward III, so two centuries later we find Gresham doing for Edward, Mary and Eliza- beth. Thus it would appear that after the downfall of the Italian merchants, De la Pole was able to win the confidence of a group of Flemish merchants and that on the whole their transactions had proven to be suflSciently satisfactory to cause them and their successors to be willing to continue financial relations over two centuries — relations which were to continue for yet other centuries. 1761 BANKERS TRUST COMPANY Early Italian Corporate Banks Before we take up the consideration of the development of banking in England let us now retrace our steps and see what happened in Italy following the commercial crisis due to the failure of the Bardi and Peruzzi. It would appear that there were recurrent revivals of business activities and of failures not unlike the recurring crises with which we have become familiar in modern times. Notwithstanding occasional dis- asters the banks, as they came to be called as early as 1421, grew and multiplied. They were banks both of deposit and discount. "Giro** payments — that is, payments by means of transfers on the bankers' books — ^were made from the early part of the fifteenth century. Transferable certificates of de- posit were issued and used "like coin.'' So these early banks were banks of issue as well as banks of deposit. Some of these private banks became very powerful. However, recurrent failures which sometimes were due to bad banking practices, but often to forced loans to the Government which tied up a large part of the bankers' resources in a fixed form, weak- ened confidence in the private bankers and led to the estab- lishment in Venice, in 1584, of the first public bank. This was known as the Banco della Piazza del Rialto. This bank restricted itself to keeping depositors' money in security, and to paying it out or transferring it according to their direc- tions. In 1587 the private banks were suppressed. The need for further banking facilities led in 1619 to the establishment of the famous Banco del Giro, which in 1637 absorbed the Banco della Piazza del Rialto. The Banco del Giro, or, as it came to be known, the Bank of Venice, continued in business until 1806. ENGLISH PUBLIC FINANCE [177 Another famous early Italian bank was an outgrowth of the business of the Compania, or Casa, di San Giorgio of Genoa. This institution is described by Andreades in his ^^History of the Bank of England" as an association of State creditors who managed the revenues of the republic, owned colonies and possessions, maintained armies and fleets, made war and concluded treaties, and combined with all these various functions the duties of a bank of deposit. Its gene- sis dates back to the organization in 1148 of a company to make a loan to the republic. By 1250 a number of such com- panies, which were called "Compere," were merged under the name of Compera del Capitalo. In 1407 Jean le Maingre, Marshal of France, changed this compera into the Ufficio di San Giorgio, which continued until 1736 the business of mak- ing advances to the State. It soon became a State within the State, possessing great power and influence. Just how early it began to do a banking business is not evident. Its cartulary or registered notes were somewhat similar in char- acter to modern bank notes. They* were certificates of de- posit, but as the deposits were not held as a definite fund to secure them but used in the general business of the bank the notes in fact circulated on the general credit of the bank. This bank continued in business until 1797 when it failed. So much for the early Italian banks. The Bank of Amsterdam In the Bank of Amsterdam, founded 1608 or 1609, the Dutch possessed the third public bank to be organized. Founded after the Italian bapks, it continued in business until 1790, when its aff"airs were liquidated by the city, which guar- anteed its solvency. The Bank of Amsterdam theoretically held in trust the actual coin or bullion deposited with it, issu- :i^ i f "'iP liWi 178] BANKERS TRUST COMPANY ing Its notes against such deposits. At a time when the coin- ages were systematically sweated and clipped the function which this bank performed of practically insuring the integ- rity of the currency was a valuable one to the commercial community. Thus its notes came to command a premium for purposes of exchange. The failure of the bank was pre- cipitated by the disclosure that its assets had been clandes- tinely loaned to the Dutch East India Company. To return to England. T/ie English Goldsmith Bankers Those who first engaged in business operations in Eng- land analogous to the modern profession of banking were the Italian merchants commonly known as Lombards. Hence Lombard Street in London, where their homes and places of business were chiefly situated. Naturalized foreigners and finally natives took up the business. The goldsmiths, as they were called, united the trades of the goldsmith, of the dealer in bullion and of the money-lender. In the latter ca- pacity the goldsmith also conducted a pawn-brokerage busi- ness. Sometimes the pawns were the royal jewels and the jewels of the nobility, for the goldsmith was a canny person and usually took good care to obtain security for his ad- vances. A traveler who visited England from the Continent in 1593 tells us that in Lombard Street he saw "all sorts of gold and silver vessels exposed to sale, as well as ancient and modern coins.** The goldsmiths gave and took a bond on receiving and lending money. They exacted heavy payments for their loans. About the time of Charles I — say, from 1625 — it became customary for the merchants to entrust their bal- ances to the goldsmiths. Before that, for some time, they had been in the habit of depositing them for safekeeping in ENGLISH PUBLIC FINANCE [179 the Tower of London. However, after Charles had seized £130,000 temporarily deposited in the Tower while en route from Spain to Dunkirk, the merchants were afraid to make further deposits, even though, after they had consented to make the King a loan of £40,000, he had released this particu- lar deposit. They then got into the habit of entrusting their surpluses to their cashiers. Some of these, of a thrifty turn of mind, instead of "wrapping their talent in a napkin'* deposited the trust fund with the goldsmiths and so realized interest which substantially increased their yearly stipend from their em- ployers. The latter then awoke to the fact that by such an arrangement their funds could be safeguarded and income increased and so deposited them directly with the goldsmiths for their own account. This custom developed greatly during the troublous times of the civil wars and in the Cromwellian era until it is said that half the gold in the kingdom came to be stowed away in the goldsmiths' vaults. The banking business of the mer- cantile community was in the goldsmiths' hands and from this business they derived handsome revenues, laying the foundations for fortunes, some of which have continued to the present day, and for banking businesses which in one form or another still endure. Charles II dealt the goldsmiths and their clients a cruel blow when in 1672 he confiscated the loans which the gold- smiths had made to the Exchequer. This ''Stop of the Ex- chequer,'* already noted in a previous chapter, involved the large sum of £1,328,526 and, as might be expected, was fol- lowed by serious consequences to the goldsmiths and to the entire community. < / it lij Chapter III The Early History of the Bank of England ^ I ^HUS It was when, about twenty years after the happening -■■ of the events just described, WilHam Paterson of Dumfries came forward with a project for a bank which would be the equal in strength of the Banks of Amsterdam, of Venice and of Genoa, he received a ready hearing in busi- ness circles. In 1691 Paterson urged the establishment of a national bank, so as to provide a safe means of borrowing money at proper rates of interest. Many of the great London merchants supported his project, notably, Michael Godfrey, one of the richest and most honest city men of that time. The plan was coldly received by Parliament, but the neces- sities of the Government for funds with which to prosecute the war against France led a committee of the Commons, to which a consideration of the project had been referred, to advise Paterson that they would receive any proposal to advance one million pounds on a perpetual fund of interest. As the committee were unwilling to concede any reciprocal rights, Paterson and his friends naturally were not interested and abandoned the project for the time. Finally in 1694 they achieved their purpose, but the proposal "had to be smuggled into Parliament under cover of a bill imposing a new duty on tonnage, for the benefit of the capitalists lending money toward carrying on the war with France." This was known as the Tonnage Act. As it finally became a law the bill provided that the sub- scribers to a perpetual loan of £1,200,000 should form a cor- poration to be called **The Governor and Company of the 180I ENGLISH PUBLIC FINANCE [181 Bank of England.'* The fund so raised was to be loaned to the Government. The First Years of the Bank When the Bank of England was organized in 1694 it com- bined all of the methods of banking then known. Its capital of £1,200,000 was loaned wholly to the State for an annual return of £100,000 — that is, for "an interest" of 8 percent, and £4,000 for management. The Bank acquired the right to receive deposits, to issue its demand notes and to loan its funds. It also bought and sold bills of exchange. It was organized entirely with private capital and as a private enterprise. However, it had very close relations with the State from the day of its organization. At first it had no monopoly rights of any kind. It was political necessity which brought it into being. The Whig government was sorely in need of funds to maintain its existence against foreign aggression, unsettled conditions in Ireland and a latent liking of many of the great Tory families for the deposed James II, whom they would have been pleased to have seen back on the throne. The Bank not only provided William III, sometimes called Dutch William, and his Whig supporters with the original £1,200,000, but it stabilized the exchanges, helped to market the long annuities with which the people were just be- coming familiarized, and also, even in those early days, made temporary advances to the Government. The Bank began business without a dollar of cash capital. Its resources were the "fund of credit,** as the saying of the time had it, due to its holdings of the Government debt, its note issuing rights and its deposits. The good effects of such an institution were immediately telt. The Exchequer officials no longer had to make "fre- m I82] BANKERS TRUST COMPANY ENGLISH PUBLIC FINANCE [183 quent processions to the city to borrow money on the best and nearest public securities, at ten or twelve per cent, per annum interest/' The mercantile community had a source from which to obtain loans at reasonable rates, and the foreign exchanges were rendered more stable. One of the earliest and most important of the public functions of the Bank was to assist in the rehabilitation of the coinage which was so debased at the time of William's accession that one of the first acts of the new government had been to arrange for its restoration. In the early days the Bank allowed interest on its notes and also upon its deposits, a practice afterward abandoned. Today the Bank is chiefly a bankers' depository and therefore an offer to pay interest upon deposits would place it in com- petition with its chief patrons and interfere with its functions as the holder and protector of the ultimate banking reserve of the nation. On the other hand, in the inception of its busi- ness it desired to build up its deposits and increase its note issues by attracting money from the goldsmiths; therefore the payment of interest was a powerful lever for this purpose. The Bank was nearly wrecked in the second year of its career by its goldsmith enemies, who, taking advantage of the fact that there was a great scarcity of coin because of the restora- tion of the coinage then in progress, gathered up quantities of the Bank's notes and demanded immediate redemption. As the Bank could not promptly enough secure coin from the mint it could not respond and was temporarily compelled to suspend specie payments. To ease this situation the first Exchequer bills were issued. The necessities of the Government led from time to time to overtures to the Bank for larger advances. Taking advan- tage of such situations the Bank made them the basis for securing valuable concessions and additional privileges^ in particular a monopoly of note issue. Mutual concessions on the part of Government and Bank were made, until today the Bank has the exclusive right of note issue in England, except for the unimportant exception noted on page 192, the management of the debt, the Government deposit accounts, freedom from taxation and other privileges. The ownership and control of the Bank remains to this day in the hands of its proprietors. The State has no proprietary interest in the capital of the Bank and no voice in its management. Instead of attempting a detailed history of the Bank we may to better advantage consider certain special happenings in its long career. There are three especially notable periods in this history. These are the twenty-three years of the Great French War, the events of 1844 and the connection of the Bank with the financing of the recent war. fThe notable services rendered by the Bank during the crucial period of the past six years have already been discussed. We may now consider the two other great crises in its history Lessons of Eighteenth Century Commercial Crises We may note in passing that the Bank successfully weath- ered the commercial crises of 1763, 1772 and 1783 and the directors learned by experience "that while a drain of specie is going on their issues should be contracted as much as possible, but that as soon as the tide had given signs of ceasing and turning the other way it was then safe to extend their issues freely." The control in normal times of the inflow and outflow of specie by raising or lowering the bank rate of dis- count was another lesson which the managers learned and tPart I. Chapter V. and Chapter VI. :l ii 184 1 BANKERS TRUST COMPANY have ever since used effectively, except during the suspension of specie payments during and following the French wars and the practical suspension of such payments since 1914. The industrial revolution in England in the early part of the eighteenth century, due to the invention of labor saving devices and the discovery of new processes of manufacture, led to a concentration of population, to great activity in man- ufactures and in commerce and hence to the need for banking facilities on an enlarged scale. As joint-stock banks were prohibited, as more fully explained in a later chapter, this need was supplied by many small banks of issue and deposit organized by six persons or less — shop-keepers, chemists, tailors and bakers, or what not. The coun- try and city thus were flooded with circulating notes of weak banking partnerships. Many of these issues proved to be worthless. From 1750 to 1783 the country banks increased from twelve to four hundred. In the crises of 1793 and 1797 many of these banks failed. Chapter IV The Bank and the Great French War TN 1793 when England was drawn into the maelstrom of A war in Continental Europe, brought about by the French Revolution, the Bank was in a strong condition. Its capital had reached £11,786,000 — all loaned to the Government. It had a surplus ("The Rest'') of over £3,000,000. It had notes outstanding for £11,600,000. Its specie reserve was about £5,000,000. William Pitt was Chancellor of the Exchequer. The war came to him and to his confreres as a surprise. The English people had been watching the revolutionary pro- ceedings in France with great interest. They had not ex- pected that England would be involved. Pitt and his gov- ernment had made all of their plans for a long period of peace in which to fully recover from the losses of the American War which were still keenly felt. Therefore the determination to engage in war with France found the Government unprepared, the Exchequer empty, or relatively so, and the country still aghast at the burden of debt which had accrued from the American War and the other wars of the eighteenth century. General business condi- tions were bad, due to a succession of bad harvests and the culmination of a period of overtrading. Many country bank failures were occurring. The Bank of England itself became alarmed, contracted its credits and raised the rate of discount. To relieve the situation the Government had found it neces- sary to authorize a special issue of Exchequer bills to be loaned to merchants. It was in the midst of such financial conditions that Pitt [185 » W\ i86] BANKERS TRUST COMPANY ENGLISH PUBLIC FINANCE [187 'IW was forced to find the means with which to finance the war needs of England and her allies. Great sums must be sent abroad for subsidies and for the support and pay of the army and of the navy. The Finance Minister and the City had a very difficult situation with which to deal— depleted resources, adverse exchanges, heavily increased demands. Under the circumstances it is small wonder that Pitt used the resources of the Bank to the limit. He first secured legislation removing the restriction which Parliament had originally laid upon advances from the Bank to the State. The Bank was then at his mercy. In four years, from 1794 to 1797 inclusive, the debt of the Government to the Bank for advances of various kinds totaled just under ten million sterling. To meet the demands upon it the Bank increased its note issues. Mean- while its cash resources were running down in an alarming way. After increasing to about seven million pounds in 1794 they fell to six million in February 1795, to five million in August, to an average of a little over two million in 1796 and finally to £1,086,000 in February, 1797. Specie Payments Suspended ijgj-1821 The inevitable happened. Specie payments were sus- pended, not to be resumed until 1821. For a quarter of a century England was to experiment with an inconvertible currency. The King himself presided at the meeting of the Privy Councilwhich authorized the suspension. A meeting of bankers and merchants passed a resolution agreeing to accept the notes of the Bank for payments due them. This resolution was supported by some four thousand signatures. The matter was referred to Parliament for action. An examination by a parliamentary committee disclosed the fact that in addition to the permanent debt of £11,700,000 represented by its cap- ital, the Bank had loaned the State over ten million out of its other assets of £17,600,000 leaving as an offset against £13,- 800,000 demand liabilities and about £8,600,000 notes about £7,600,000 of banking assets other than obligations of the Government. Not exactly a liquid condition, especially when it is remembered that the specie reserve had fallen to £1,086,- 000. Substantially all of the floating debt of the State was then held by the Bank. How was this situation dealt with? Parliament passed what is known as the Restriction Act. This granted the Bank and all connected with it a bill of indemnity. The Bank was forbidden to pay out specie except for the needs of the army and navy and for other special purposes approved by the Privy Council. The Bank was forbidden during the restric- tion to make advances for the public service in excess of £600,000. Bank notes were made a legal tender in payment to the Government and between others by agreement. Pro- vision was made for the issue of £1 and £2 notes and, for smaller payments, Spanish dollars were put in circulation, at a valuation of 4s 6d. Pitt threw all of his influence in favor of the conservation of the Bank's credit, so that during the remainder of his life- time there were no excessive issues of notes. Therefore they remained substantially at par with gold. After Pitt's death, from 1809 to 1 8 17, the issues of notes steadily were increased. This course of action was due partly to the exigencies of the Government and partly to the speculative conditions in the business world. It will be remembered that Napoleon endeavored to bring England to her knees by closing to her all of the Continental ports and markets. While such closing was only partial, as ^f Mi i88] BANKERS TRUST COMPANY ENGLISH PUBLIC FINANCE ■ if lit many ways were found of evading the edict, still it acted as a great stimulus to the home production of articles which would otherwise have been imported. At the same time the South American colonies of Spain and Portugal were declaring their independence and opening their ports to English products. These conditions led to speculation, which the Bank encour- aged by greatly expanding its credit facilities. These facil- ities were further accentuated by the large amounts of Ex- chequer bills put out by the Government, plus the consider- able sum of inland bills of exchange which was in use and the country banks' bills which were in circulation. Ejects of the Suspension Advancing prices of commodities, including gold, and adverse foreign exchanges were the barometers which meas- ured the inflation produced by the large issues of bank and Government paper. According to Andreades, after being at a discount of £8 7s per £100 in 1801 and £7 5s in 1802, Bank Notes were almost at par (average £2 3 s discount) from 1803 to 1809. The depreciation then became marked, averaging as follows, until the resumption of specie payments in 1821 : Year 1810 . . . 1811 . . . 1012 ... 1813 . . . I014 ... 1815 . . . Silberling, by another basis of computation, arrived at the conclusion that the premium on gold in 1811 averaged nearly 22 per cent., in 181 2 over 32 per cent., in 18 13 over 40 per cent. The Hamburg exchanges averaged 18 per cent, from normal in 18 10, nearly 31 per cent, in 18 11, over 24 per cent. £ s Year 13 9 1816 7 16 1817' 20 14 to 22 18 1818 25 3 1819 19 4 1820 £ 16 s 14 2 13 4 2 9 12 [189 in 1812, and over 26 per cent, in 1813. Commodity prices advanced until about 18 14, averaging at their highest point about 70 per cent, above those of the pre-war period. The Bullion Report In 1810 a committee of Parliament known as the "Bul- lion Committee'" made an exhaustive study of the causes which had produced these conditions, so far as they had then developed. The report of this committee is one of the land- marks on the highway of economic studies and is well known to all students. Therefore, we may to advantage refer briefly to the conclusions of the committee as set forth in the report. The points in controversy which they set them- selves to solve were these : Have the bank notes depreciated in value or has the price of gold actually risen.? Has the in- crease in the volume of the notes had any influence upon the exchanges.? What effect would a restriction of the issues have on the price of gold and the rate of the exchanges.? What policy should be followed in regard to the regulation of the issues.? The committee called before them bank directors, private bankers, merchants and others. The conclusions at. which they arrived were these; First, that an inconvertible and excessive credit currency caused a general rise in prices, including that of gold, and a fall in the exchanges on all coun- tries except those which had an equally depreciated currency. Second, that there then existed an excessive paper currency. Third, that the only true and proper remedy was resumption of cash payments. Unfortunately Parliament took an opposite view of the case. This encouraged the increasing issues on the part of the Bank, leading to the conditions, up to 1817, which we have already noted. ( I :( I •§ i 190] BANKERS TRUST COMPANY Resuffiption of Specie Payments in 18 2 1 These conditions referred to were so serious that on Febru- ary 3, 1819, the two houses of ParHament each appointed a Committee to inquire into the position of the Bank. These Committees, after hearing the views of bankers, pubHcists and others, recommended a gradual resumption of specie pay- ments. In pursuance of their recommendations an Act was passed unanimously in 18 19 providing for the resumption of specie payments on May i, 1823. This date was anticipated by two years, the metallic basis again becoming effective May I, 1821, Chapter V The Joint-Stock Banks IN 1697, Parliament evidently intended to give the Bank a virtual monopoly, since no other corporation of the nature of a bank was to be established thereafter by Act of Parlia- ment. However, this Act did not forbid the formation of joint-stock companies for other purposes nor forbid them to undertake a banking business. Shortly thereafter a corpora- tion, called the Company of Mine Adventurers of England, issued circulating notes, and apparently in so doing was quite within its legal rights under the Act of 1697. In 1708, to clear up this situation Parliament enacted, "That during the con- tinuance of the said corporation of the Governor and Com- pany of the Bank of England, it shall not be lawful for any body politic or corporate whatsoever * * * qj. f^j. ^j^y other persons whatsoever, united or to be united in covenants or partnerships^ exceeding the number of six persons, in that part of Great Britain called England, to borrow, owe, or take up any sum or sums of money on their bills or notes payable at demand, or at any time less than six months from the . borrowing thereof." As the issuing of notes was at that time considered to be the very essence of banking, this Act was popularly taken to forbid the organization of any other bank. In fact it only forbade the organization of banks of issue by strong corporations, but left the door open for any group of six persons or less, however irresponsible, to engage in banking and to issue notes. It was thus that the great num- ber of mushroom country banks came into being whose fail- ure precipitated or accentuated commercial crises for more than a century and whose note issues increased the redun- [191 .•/< i 'A ii 192] BANKERS TRUST COMPANY ENGLISH PUBLIC FINANCE dancy of the currency during the period of the suspension of specie payments. By an Act passed in 1826 corporate banks of issue were permitted if located more than 65 miles from London. This continued to be the law until 1844 when Parliament deprived both private banks and joint-stock banks of the right of issue as explained in the next chapter discussing the Bank Act of 1844. However, those actually in existence — viz: 72 joint- stock banks and 207 private banks — retained limited privi- leges of note issue. The law provided that as such privileges lapsed they should accrue to the Bank of England. At the present time (1920) only six private banks and three joint- stock banks have issue rights and the aggregate authorized issues of these banks is only £334,820. In 1733 Parliament affirmed the legality of joint-stock banks which issued cheques. The Bank of England had vainly endeavored to prevent the passage of such legislation. Steps were at once taken by Ja;mes W. Gilbart and associates to organize "The London and Westminister Bank." This bank was opened at 38 Throgmorton Street, with a branch at 9 Waterloo Place. In its prospectus it was stated that the bank would receive current accounts and that persons who did not care to keep a balance might "instead thereof, pay to the bank a certain sum annually for the management of their account." Interest at the rate of two per cent, per annum was offered on sums ranging from £10 to £1000 received on "per- manent lodgment." No interest was allowed on the balance of a current account. In 1832 there were 62 private banks in London. In 1834 the number of private country banks and branches thereof in England and Wales was 638 and there were 45 joint-stock banks. Therefore, at or about the time of the organization [193 of the London and Westminster Bank, there were in England about 745 banks and banking offices in addition to the Bank of England and its 12 branches. We are without information as to the resoiiirces of these banks, other than the Bank of England. It is of interest to note that Barclays Bank, which absorbed the London and Westminster in 1918, had according to a recent report over 1400 branches. The joint-stock banks of England and Wales now number only about 22 and the private banks 7 — say, about 29 in all — but they have in the neighborhood of 6,300 branches. This great decrease in the number of banks and increase in branches is due to the policy of bank consolidations which has been a marked feature of English banking for so many years and especially during the last two or. three years. On December 31, 1919, the total re- sources of the joint-stock banks of England and Wales were about £2,300 million. Of these vast resources, £1742 million — say, 76 per cent. — ^were held by five great banks. In alphabetic sequence, these banks, their liabilities and equiva- lent resources on December 31, 1919, were as follows: THE ^'BIG FIVE'' JOINT-STOCK BANKS In Millions Sterling Capital and Name Reserves Barclays 15,8 Lloyds 19,1 London Co., Westminster and Parr's 17,3 London Joint City and Midland 16,8 National Provincial and Union 15,0 84,0 Accept- ances and Endorse- ments Deposits (inc. Un- divided Profits, etc.) Total Liabilities 13,6 296,1 325,5 32,1 325,9 377,1 23,7 305,8 346,8 29,0 373,0 418,8 6,0 252,4 273,4 104,4 1553,2 1741,6 ttll ilfe Chapter VI The Bank Charter Act of 1 844 BEFORE taking up the consideration of the legislation of 1844 we may make note here, for the sake of the record, of some items of importance in regard to the Bank. The liabil- ity of the stockholders of the Bank of England is limited to the amount of their stock. In 1722 the reserve fund or Rest was established, never to be allowed to run below three mil- lion pounds. This added to the strength of the Bank and made it possible to equalize dividends which theretofore had fluctuated greatly. In 175 1 the administration of the debt was entrusted to the Bank and in 1826 the Bank was given authority to establish branches; of these, there are now ten, located respectively at Birmingham, Bristol, Hull, Leeds, Liverpool, Manchester, Newcastle, Plymouth, and the West- ern and Law-Courts Branches, London. The notes of the Bank were made a legal tender in 1833. Bank Statements in England 'In 1833 the Bank was required to render weekly state- ments to the Chancellor of the Exchequer, which statements were to be consolidated and published every three months in the London Gazette. The statements published by the Bank are very meagre and do not give one a complete view of its afFairs. For comparison of one period with another, too, they are of little value, as it is the practice of the Bank to reduce the amount of its securities and deposits by any borrowing which it carries out and as it probably makes other adjust- ments which are not of public record. After 1875 it discon- tinued publishing the amount of discounted bills which it 194] ENGLISH PUBLIC FINANCE [195 held. After 1877 it ceased publishing the London bankers* balances. After 1880 the separation formerly made between notes issued by the branches and in London was no longer made. To an American banker accustomed to the rigid supervision given to the afFairs of the banks of the United States by State and Federal governments and to the lime- light of publicity which is turned on the afFairs of our banks the lack of such supervision in Great Britain and the failure to require publicity is a surprise. It is because of such failure to enjoin any uniform system of accounting or of reporting that it is so difficult to make a really thorough and scientific study of English banking. Apropos of this the London Economist in its Banking Number issued May 17, 1919, says: "The figures published weekly by the Bank are at all times full of snares for the unwary investigator, and are more so than ever in wartime, owing to the very complicated business that has to be done by the Bank, and the consequent cross currents that are concealed behind the inarticulate reticence of the items in its return. Any future historian who relies too closely on the Bank's figures for information is thus likely to flounder up to his neck." The Bank Charter Act of 1844 Recurrent commercial crises, and especially the crisis of 1836-1839 which brought the Bank to the verge of ruin, led English bankers and economists of the time to make ex- haustive studies of the causes of such events. The rule which had been formulated by the Bank for the conduct of its business was as follows: First, the reserve kept, composed of bullion and of Securities, was to be equal to its liabilities. Second, the regulation of the note circulation was left to the public through the natural movement of the foreign ex- I' 196] BANKERS TRUST COMPANY changes. Third, whether the demands on the Bank came from at home or abroad, it was to maintain a metallic reserve equal to one-third of its liabilities. This supposed rule it was difficult invariably to observe. In fact it was often broken. A heavy drain of specie in 1839 carried down the reserve to a nominal amount. The condition of the Bank became so serious that it was only saved from failure by the use of heroic measures the most important of which was a large loan from the Bank of France which had been founded in 1800 by Napoleon. It was evident to the thoughtful banking men of the day, and to other students of finance, that steps must be taken to safeguard the Bank's reserves in future. It was desirable also, if possible, to stop these recurring periods of distress in the business world. Following a customary English method for dealing with difficult problems, a parliamentary committee was appointed to examine into the causes of the trouble and to suggest a remedy. This committee sat for over five years and asked more than 14,000 questions without reaching any defi- nite conclusion or even presenting a report. Finally Sir Robert Peel, then Prime Minister, decided that it was time to bring matters to a head. Therefore, taking advantage of a clause in the law which empowered the Government to sus- pend the Bank's charter in 1845, he brought forward a bill which became the Bank Charter Act of 1844. Convinced that the source of the trouble was due to over- issues of currency, he sought to devise a plan which would cure this evil. He proposed to take away from the private and joint-stock banks the right of issue and to concentrate all such rights in the Bank of England. Further to guard against over-issues he proposed that, save for a minimum ENGLISH PUBLIC FINANCE [197 amount, all issues of the Bank should be covered by an equivalent amount of specie, especially reserved for their redemption. Provisions of the Act The law based on these propositions provided as follows: 1. After August 31, 1844, the Bank of England was to be divided into two departments, the issue department and the banking department. Securities to the amount of £14,000,- 000, of which the perpetual Government debt of £11,000,000 was to form a part, were to be transferred to the issue depart- ment; also all the gold coin and gold and silver bullion not needed in the banking department. The issue department was to give back to the banking department an amount of notes equal to the securities, coin and bullion so transferred to it. It was provided that the silver in the issue department should never exceed one-fourth of the gold. 2. The limited rights of issue continued to bankers al- ready having such rights, as they lapsed, were to the extent of two-thirds thereof, to revert to the Bank. Thus it is that today the Bank has a right of issue against securities of , £4,450,000 in excess of the original £14,000,000. 3. The Bank was exempted from all stamp duties on its notes. In lieu thereof it was to pay the Government a lump sum of £180,000 a year. 4. The Bank was obligated to buy standard gold when- ever offered to it, giving in payment its notes at £3 17s gd per ounce. 5. Weekly accounts in a specified form were to be sent to the Government and published in the London Gazette weekly, instead of quarterly as required by the Act of 1833. i ii ■ It 11 198 1 BANKERS TRUST COMPANY This division of the functions of the Bank into two depart- ments has been severely criticized as arbitrary and unscien- tific. Suspensions of the Act The result of the legislation was to put the management of the Bank in times of crises in a strait-jacket, as far as notes were concerned, from which they could escape only by special enabling legislation by Parliament. This has been had four times in the history of the Bank — in 1847, in 1857, in 1866 and in 1914. The mere fact that additional notes could be issued has of itself, in each case, been sufficient to allay the fears of the business community. The increase made in the amount of uncovered note issue in the earlier periods was trifling, while in the last instance an important increase was made unnecessary by the issuance of the Government Treasury notes. As a matter of record it may be noted that for a couple of days while Treasury notes were being printed there was an excess fiduciary issue of Bank notes amounting to £3,043,000. Under the Federal Reserve System of the United States and of the Continental statte banks, notes are created and issued on the security of discounted bills and on the specie re- serve. Thus theoretically the volume of notes is responsive to the requirements of business, expanding and contracting with the periods of activity and quietude. On the contrary, with the Bank of England the note issue can only be in- creased against the deposit of specie in the issue department. As the bank carries substantially the entire specie reserve, such deposits can only be made by the withdrawal of gold from the banking department, thus weakening the reserve against deposits and therefore the confidence of the business ENGLISH PUBLIC FINANCE [199 community just at a time when the contrary conditions should prevail. Therefore there is a growing feeling on the part of many bankers that the two departments of the Bank should be merged and the note issuing powers modernized. However, in times of great stress, such as the world has just been passing through, the best of systems tends to give way to emergency measures which cannot be defended on any principle of sound banking. The Bank of England has come through the storm in strong condition and. has done yeoman service in upholding the hands of the Government and of the business community. This does not change the fact that upon a return to normal conditions it may be wise definitely to repeal the Act of 1844 in favor of a system based upon banking experience gained since that time. li '1 ill Chapter VII The Government of the Bank npHE method by which the Bank of England is governed -^ IS so unique and so different from that observed in con- nection with any other bank that it will be of interest to consider it in some detail. The bank is governed by a board of twenty-four directors, a Governor and a Deputy Governor. TAe Directorate The Board of Directors is self-electing. In theory, a certain portion go out annually, remain out a year, and are subject to re-election by the proprietors, but in fact they are nearly al- ways re-elected after a year. This has been the unbroken practice for many years. When a vacancy occurs by death ot resignation it is filled by an election by the board. It is the practice in electing new members to choose young men, usually men connected with old established mercantile firms of London. The status which is given by an election to the board, both to the individual who fills it and to the firm of merchants to which he belongs, is considerable. The selection of men to receive this honor is made with great care for a reason which will now be stated. The Governor and Deputy Governor The ofllices of Governor and Deputy Governor are given in rotation. The Deputy Governor always succeeds the Governor and usually the oldest director who has not been in oflSce becomes Deputy Governor. Occasionally, for 200] ENGLISH PUBLIC FINANCE [201 special reasons, the election for the Deputy Governor is not always made in rotation, but except in rare cases a director must serve as Governor and Deputy Governor about the time when his turn comes. On the other hand, he will not be asked to serve much before his turn. It is usually about twenty years from the time a man is first elected a director before he arrives, as it is called, "at the Chair.** Because it is important that the men who fill the offices of Governor and Deputy Governor should still be in the vigor of life, the choice of new directors is always made from among young men. It might be feared that such a course would place upon the Board men who would be overambitious or would take chances which older men would not take, but the danger of such a happening is overcome by the fact that some of the directors retire annually. By courtesy it is always the young directors. Those who have served as Governor always remain. There- fore the young part of the Board is the fluctuating part, and the older part is the permanent part. The younger men, therefore, have but little influence. The Committee of Treasury As a further provision against any immature methods of handling the aflTairs of the Bank, the older members of the Board form a standing committee of indefinite powers. This is called the Committee of Treasury. No precise description has ever been given of the powers which this committee exer- cises. They appear to be of a general supervisory nature and in particular to control the relations and negotiations between the Bank and the Government. By immemorial usage, the directors of the Bank of Eng- land cannot be themselves professional bankers. In the old times every bank was supposed to be more or less in opposi- I ill 11 if m I' r» '11 i I i f ■P^i ■ 202] BANKERS TRUST COMPANY tion to every other bank. Therefore it was not thought wise that any London banker should have a chance of being a Bank director and no banker today would think of being such a director. However, this does not prevent the selection for directors of men who are connected with merchant banks which do not receive deposits payable in small sums or on demand. The Oncers In the Bank of England there is no fixed executive. The Governor and Deputy Governor who form the executive, as a rule change every two years. They are expected to be con- stantly present at the bank, to see all applicants for advances, to carry on the almost continuous correspondence between the Bank and its largest customer, the Government, and to bring all necessary matters before the Court of Directors or the Committee of Treasury. In a word, to do very much the same as falls to the lot of the manager in most companies. There are, of course, permanent heads of departments, and it is understood that during the war some important new de- partments were created. While these men have high standing in the Bank and much authority in their respective depart- ments, yet they are essentially subordinate. No one of them is like the general manager of an ordinary bank. A changing management, such as the one by which the Bank is governed, would not be thought of in connection with any other corporation. It also seems strange that trained bankers should be excluded from the Board of Direc- tors of the Bank which up to the present time has been ad- mittedly, in a sense, the reserve bank for the world's com- merce. ENGLISH PVBLIC FINANCE [203 T/ie Court and Committees The directors of the bank, together with the Governor and Deputy Governor, twenty-six persons in all, are known as "The Court." They meet once a week and usually sit for a very short time only; say, from about eleven or twelve o'clock until one or o|ie-thirty. It has been said that if they were to sit for four hours there would be a "panic solely from that.'' The Court of Directors is divided into certain committees. In addition to the Committee of Treasury already described, there is a Committee of Daily Waiting, a Committee for Law- suits and the Management of Branch Banks, a Committee for the House and Servants and Clerks, a Committee of In- spection for the Cashier's Office and a Committee of Inspec- tion for the Accountants' Office. In addition to these com- mittees special committees are from time to time appointed as occasion may require. The Committee of Daily Waiting consists of three direc- tors in rotation from the whole body. Their attendance is at II 130 daily and they are required to remain until all that part of the business of the day which is usually referred to them is concluded. All bills offered for discount in London are sub- mitted to this committee and all bills discounted at the country branches, except local bills, are shown to them on the following day. They likewise have charge of all bullion not required by the cashiers for daily wants. The duties of the other committees are evident from their titles. The Clerical Machinery <€ The clerical machinery of the Bank is divided into the Cash Side" and the ^^ Accountant Side." The "Cash Side," »ll J -* li'i); I' It 204] BANKERS TRUST COMPANY which IS under the immediate supervision of the Chief Cash- ier, comprises the transaction of all business where actual cash is concerned, together with* the necessary bookkeeping which it involves. The latter division, under charge of the Chief Accountant, takes cognizance of all matters of pure bookkeeping where no actual cash is concerned, such as those which relate to the national debt account, registration of bank notes and kindred work. The Bank has a large staff of employees for whose benefit there is maintained a provident society to promote life insur- ance among their members and the payment of annuities for widows of bank clerks and porters. There is a well appointed library and reading room. There is a physician in attendance who is called the Medical Officer. He looks after the health of the clerks and other employees. The clerical force of the Bank is employed on a strictly civil service or competitive plan. Men entering the Bank in their youth frequently spend their entire lives in its service. TAe Bank Building The building of the Bank of England is located in the heart of what is known as "The City/' the corporate center of London now chiefly identified with the interests of city government and finance. In this section is the Mansion House, where the Mayor presides over the destinies of the city. Nearby is the Royal Exchange founded in the days of Queen Elizabeth, and the Stock Exchange the traditions of which also date back to the very early days. Lombard Street, the home of the goldsmiths and for many years the chief financial street in London, is nearby. The head offices of the joint-stock banks and of the great private banking houses are not far away* ENGLISH PUBLIC FINANCE [205 The entrance to the bank is from Threadneedle Street through a large arched gateway which leads into a quad- rangular court from which communication may be had to all parts of the building. This court is guarded by a porter arrayed in bright crimson and gold lace and bearing a staff; while the bank messengers are dressed in swallow-tail coats of a delicate slalmon color with silver buttons, flaming scarlet waistcoats, black trousers and high silk hats. In the basement of the bank are barracks wherein 36 soldiers are quartered from 7 o'clock every evening until the next morning. This custom arose at the time of the Lord George Gordon riots in June, 1780, when the bank was threat- ened by a mob. In addition to the soldiers there is a body of watchmen well trained in the use of the ample arrangements provided for in case of fire. The building covers about eight acres of ground. The first stone was laid in 1732. It is erected around nine courtyards, the largest one of which has a substantial amount of green sward with one or two beautiful elm trees and some shrubbery. There is also a fountain playing beneath the trees. For the first forty years of its existence the Bank was domiciled in the hall of the Grocers' Company, but in 1734 moved into the present building. In the great hall of the bank building there is a statue of William III, in whose reign, it will be remem- bered, the bank was founded. ENGLISH PUBLIC FINANCE [207 ' ft* \: Chapter VIII The Scotch and Irish Banks TN what goes before we have confined our studies to the -^ status of banking, to use the words of one of the Bank Charter Acts, "in that part of Great Britain called England/' The first notice of banking in Scotland which occurs in the statute books is an act of King William III passed in 1695, under which the Bank of Scotland was established. The Bank of Scotland remained the cinly bank in Scotland until the year 1727. At the date of the latest available reports (December, 191 8) there were eight joint-stock banks in Scot- land with 1,249 branches. These banks had total resources of £273,658,000. Their combined note issues on December 31, 1919, amounted to £28,705,345, comparing with £7,744,- 000 December 31, 1913, an increase of £20,961,345. The Bank of Ireland was established in 1783. Its privi- leges resemble those of the Bank of England. At the close of 191 8 there were nine joint-stock banks in Ireland with 848 branches and combined resources of £175,739,000. The out- standing note issues December 31, 1919, were £30,532,435, comparing with £8,074,000 December 31, 1913, an increase of £22,458,435. Note Circulation — How Regulated The bank note circulation of the Scotch and Irish banks is regulated by the Bank Acts of 1845. These Acts authorized the Scotch banks to make uncovered, or fiduciary, issues fixed at an aggregate of £3,087,209. As a result of the failure of the Western Bank of Scotland in 1858 and of the City of Glasgow Bank in 1878 the authorized fixed issue was reduced and is now £2,676,350. The Irish banks were authorized to make 206] uncovered issues fixed at an aggregate of £6,354,494. There has been no change in this authorization. The Scotch and Irish banks may increase their circulation to any extent in accordance with the public demand, pro- vided that they have gold or silver at their principal places of issue to an amount not less than the amount of such increase. The amount of silver against which notes may be issued must not exceed "one-fourth part of the gold coin held.'* The amount of notes which may be outstanding against specie is determined by averaging the note issues and the specie cover every four weeks. This provision of the law makes it possible temporarily to increase note issues without corresponding cover. The specie held in Scotland and Ireland does not form a special security against the note circulation. It is an asset held against the general liabilities of the issuing bank. It will be remembered that in the case of the Bank of England the specie securing the notes in excess of the fiduciary issue is held in the issue department solely as a reserve for the notes issued against it, while no notes can be issued, for ever so brief an interval, unless the specie is actually on deposit. By the terms of the Currency and Bank Notes Act of August 6, 1914, the note issues of the Scotch and Irish banks were made legal tender and authority was given to substitute the Government Treasury notes for specie as a cover for notes issued in excess of the authorized fixed, or fiduciary, issues. By a royal proclamation made in December, I9i9,the legal tender status was withdrawn from Scotch and Irish bank notes to take eflFect from January i, 1920, and the pre-war status restored, but no change was made in regard to the provision whereby Government Treasury notes may be used as cover for the note issues in excess of the fixed, or fiduciary, totals. i; it m I 1 208] BANKERS TRUST COMPANY Tabl es NATIONAL DEBT United Kingdom — Great Britain & Ireland Approximate Amount — March 31, 1920 For further details see numbered descriptive notes following table 000 omitted Interest Redeemable Out- Title of Loan Rate Payable or Payable standing Funded Debt £ 1. Consolidated Stock . 2K* 5 Ja., Ap., Jy.. Oct. After s April, 1923 279,764 2. Annuities 2H 5 Ja., Ap., Jy., Oct. After s Jan., 1905 2,689 3. Annuities 2K 5 Ja., Ap., Jy., Oct. After 5 Jan., 1905 21,528 Total Consols t30 1.400 4. Debt to Bank of England 2K 'Perpetual 11,015 5. Debt to Bank of Ireland 2K Perpetual 2.630 6. Total Funded Debt . 315,000 7. Terminable Annul ties — Estimated Capital Value 20,000 8. Unfunded Debt. 9* Ways and Means • Advances 204,900 10. War Loan 3K i Mar. and Sept. Z^*^^'' ^ ^^^" ^^^f\ 62,700 lOn I Mar., 1928 1 11. War Loan 4K i June and Dec. <^^^^ i Dec, 1925! I On I Dec., 1945! 12. War Loan $ i June and Dec. <^^^ ^ l^^^* ^^^^\ i,949.300 I On I June, 1947I "'^'"*' 13. War Loan 4 15 April and Oct. <^^^ ^^ ?!^^" ^^^^\ 62.300 I On 15 Oct.. 1942 J Carried forward fTotal correct — items approximate. 2.627.200 ENGLISH PUBLIC FINANCE [209 NATIONAL DEBT— Continued United Kingdom — Great Britain & Ireland Approximate Amount — March 31, 1920 For further details see numbered descriptive notes following table 000 omitted Title of Loan Brought forward National War Bonds 14. First Series . . First Series . . First Series . . First Series . . 15. Second Series . Second Series . Second Series . Second Series . 16 Third Series . . Third Series . . Third Series . . Third Series . . 17. Fourth Series . Fourth Series . Fourth Series . 18. Funding Loan . 19. Victory Bonds . 20. Exchequer Bonds Exchequer Bonds Exchequer Bonds Exchequer Bonds Interest Rate Payable 5 5 5 4 5 5 5 4 5 5 5 4 5 5 4 I April I April I April I April I April I April I April I April I Mar. I Mar. I Mar. I Mar. I Feb. I Feb. I Feb. and Oct. and Oct. and Oct. and Oct. and Oct. and Oct. and Oct. and Oct. and Sept and Sept. and Sept. and Sept. and Aug. and Aug. and Aug. 4 3 5 5 5 I May and Nov. I Mar. and Sept. 28 Jan., and July I June and Dec 5 April and Oct. I April and Oct. Redeemable or Payable Out- standing £2,627.200 On On On On On On On On On On On On On On On Exchequer Bonds. . SM i Feb. and Aug. On 21. Treasury Bills . . . 22. War Savings Certifi- cates •••«... 23. Other Capital Liabilities Total Internal Debt (Carried forward) I Oct., 1922 I Oct., 1924 I Oct., 1927 I Oct., 1927 I Apr., 1923 I Apr., 1925 I Apr.. 1928 I Apr., 1928 I Sept., 1923 I Sept., 1925 I Sept., 1928- I Sept., 1928 I Feb., 1924 I Feb., 1929 I Feb., 1929J /After . I May, 1960'! \On I May, 1990/ After I Sept., 1920 On 28 Jan., 1930 On 16 Dec., 1920 On 5 Oct., 192 1 After I Oct.. 19 IQ fi April, 1922 \i Feb., 192s. But see note (20) • 1,508,800 409,100 3S9.SOO 319,800 1,107.000 274,800 47.300 £6.653.500 2I0] BANKERS TRUST COMPANY NATIONAL DEBT— Continued United Kingdom — Great Britain & Ireland Approximate Amount — March 31, 1920 For further details see numbered descriptive notes following table 000 omitted Interest Rate Payable Internal Debt brought forward External Debt Title of Loan Redeemable or Payable Out- standing £6,653.500 24. To United States Govt. 14.212,835.993 25. Anglo-French Loan $500,000,000, half taken into account .5 15 April and Oct. 26. Five Year Secured Notes. 1134.458,000. sK i May and Nov. 27. Three Year Conv. Notes |ioi,6oo,ooo. sK i Feb. and Aug. 28. Ten Year Conv. Bonds sK i Feb. and Aug. 1148,400,000 29. Twenty Year Gold Bonds I143.587.000 . sK I Feb. and Aug. 30. Other Debt Created under War Loan Acts Total External Debt 31. Grand Total Direct Debt 32. Guaranteed Loans Guaranteed Stock (created under Irish Land Act, 1903) . . 2^% Jan. and July Guaranted Stock (created under Irish Land Acts, 1903 and 1909) 3 Local Loans Stock . 3 Met. Police Deb. Stock 3 Egyptian Government Guaranteed Loan 3 Greek Guar. Gold Loan of *98 . . . . 2K On IS Oct.. 1920 On I Nov., 192 1 On I Nov., 1922 On I Aug., 1929 On I Feb., 1937 866,831 51.400 27,633 20,883 30,504 29.514 292,035 £1.318,800 £7,972,300 After I Nov., 1933 57,213 Jan. and July S Ja., Ap., Jy., Oct. Jan. and July Mar. and Sept. April and Oct. After 3 Dec., 1939 After Apr., 19 12 On I July, 1920 At any time Redeemable at par by annual drawings Guaranteed Loans forwarded .45.229 77.058 450 6»288 4.300 £190,538 ENGLISH PUBLIC FINANCE [ 211 NATIONAL DEBT— Continued United Kingdom — Great Britain & Ireland Approximate Amount — March 31, 1920 For further details see numbered descriptive notes following table 000 omitted Interest Redeemable Out- Title of Loan Rate Payable or Payable standing Guaranteed Debt brought forward £190,538 Mauritius Stock, 1940, Guar, by Imp, Gov 3 I Jan. and July On i Jan., 1940 600 Sudan Govt. Gtd. Bonds 5K I May and Nov. 3.500 Transvaal Govt. Gtd. /., -^ "^ Stock 3 I May and Nov. ^^ ^^ i ay, 1923 1 35,000 I^On I May, I953j Transvaal Govt. Gtd. Stock 3 I Jan. and July On i July, 1958 5,000 Turkish Guaranteed Loan 4 I Feb. and Aug. 1855 3.815 Total Guaranteed Debt 238453 Grand Total Direct and Guaranteed Debt £8,210,753 DESCRIPTIVE NOTES " Stock "= Registered Bonds: See Item 33. Transfers, Denominations, etc.: See Item p. 122. I. Consolidated Stock: — "Consols." In the session of Parliament of 1751-2 an act was passed consolidating five different loans and certain annuities into one joint stock of 3% annuities. The taxes upon which the interest of these loans was charged were carried to the sinking fund out of which the annuities were made payable from June 24, 1752. This was the origin of the 3% Consolidated annuities, known in the market from that time as "Consols." The present issue of 2}^% "Consols" was created under the terms of the National Debt (Conversion) Act of 1888. Up to April s, 1889 interest was at the rate of 3% per annum, and for the 14 years ending with April 5. 1903 it was at the rate of 2^%. Since that date the rate has been 2j^%. Redeemable at par on or after April 5, 1923, in such order or manner as Parliament may direct. See also p. 122. *• 2^% Annuities created under the National Debt Conversion of Stock Act, 1884. 3' 2}^% Annuities created in 1853 for the purpose of redeeming South Sea stock and certain old 3% annuities. pi ?!j| r:' :i^ 212] BANKERS TRUST COMPANY 4. Debt to the Bank of England: — Perpetual loans made in consideration of franchise as follows: — Original Capital: £ £ 1694: Act 5 & 6W. and M.C20 1.200,000 1708: Act 7 Anne, c 7 400,000 1742: Act IS G. 2 c 13 1,600,000 3,200,000 Capital purchased of the South Sea Co. 1721: Act 8 G. I. c, 21 (residue of capital of £4,000,000 purchased of the South Sea Company) . . . 3i328,300 Other Advances to Government: 1716: Act G.I C.8, Balance of £2,000,000 of Exchequer Bills cancelled 500,000 1727: I G.2 c.8. Advance to Government .... 1,750,000 1728: 2 G.2 C.3. Advance to Government .... 1,250,000 1746: 19 G.2 c.6. Exchequer Bills delivered up to be cancelled 986,800 £11,015,100 5. Debt to the Bank of Ireland: — Perpetual loans made in consideration of fran- chise as follows: £ s d 1782: Act 21 & 22 G.3 C.16 (Irish) (Irish Currency, £600,000). 5S3.846 3 i 1797: Act 37 G.3 cso (Irish) (Irish Currency, £500,000) . . 461,538 9 3 1808: Act 48 G.3 c. 103 (Irish Currency, £1,250,000) . . . 1,153,846 3 i 1821: Act 2 G.4, C.72 (Irish Currency, £500,000) .... 461,538 9 3 £2,630,769 4 8 6. Total Funded Debt: — ^The above described issues, 1-5 inclusive, are known as the Funded Debt. The interest is a charge on certain definite forms of taxation, and is included in the permanent or fixed annual charge. See also page 94. 7. Terminable Annuities: — ^These annuities were created under diflFerent acts dating from the time of George IV. 8. Unfunded Debt: — ^All debt, except the Funded Debt and the Terminable An- nuities, is technically known as Unfunded Debt. 9. Ways and Means Advances: — ^These are book advances made by the Bank of England for short terms. See text page 42. 10. 3H% War Loan: — Original issue, £350 million. Issued in Nov., 1914 at 95%. Inscribed stock; or bearer bonds in denominations of £100, £500 and £1,000. 11. 4/4% War Loan: — Original issue, £900,857.691. Issued June 21 to July 10, 1915, partly for cash at par and partly [say, £289,797.921] in exchange for "Consols" and 334% war loan. The greater part of this issue has been exchanged for subsequent war issues. Ijascribed stock ; or bonds to bearer in denominations of £100, £200, £500, £1,000 and £5,000. 12. 5% War Loan: — Original issue, £2,075.814,114. Issued Jan. 11 to Feb. 16, 1917 at 95 for cash and on certain terms in exchange tor other previous issues. Receiv- able on certain conditions in payment of death duties. Stock and bonds and the dividends thereon are exempt from all British taxation present or future provided they are in the beneficial ownership of a person who is neither domiciled nor ordinarily resident in the United Kingdom. Dividends are exempt, without regard to domicile, if the owner of the stock or bonds is not ordinarily a resi- dent of the United Kingdom. Inscribed stock; or bonds to bearer in denomina- tions of £50, £100, £200, £500, £1,000 and £5,000. Interchangeable. 13. 4% War Loan: — Original issue £52,418,250. Issued simultaneously with (12) at par in cash and on certain terms in exchange for previous issues. Interest (dividends) exempt from British Government taxes other than super tax. For tax exemption in hands of foreigners see last clause (12). Inscribed stock; or bonds to bearer in denominations of £50, £100, £200, £500, £1,000 and £5,000. In- terchangeable. ENGLISH PUBLIC FINANCE [213 Depreciation Fund:— The holders of 4% and 5% War Loan are entitled to the benefit of a Sinking or Depreciation Fund which is under the control of the National Debt Commissioners. This fund is applicable to the purchase and cancellation of the stock and bonds of this loan whenever the market price of the 4% loan is below 100 or of the 5% loan below 95. See item 34. 14. National War Bonds. First Series. Total sales about £614 million. Offered at par Oct. i, 1917 to March 31, 1918. Exempt from all British taxation present or future if in the beneficial ownership of a person neither domiciled nor ordinarily resident in the United Kingdom. Dividends are exempt, without regard to domicile, if the owner of the stock or bonds is not ordinarily a resident of the United Kingdom. Interest on tne 4/0 Bonds exempt from British income tax other than super tax. Received in pay- ment of death duties, excess profits duty or munitions exchequer payments, it held for six months prior to the date of presentation. Convertible: 5% Bonds into 5% War Loan, 1929-4? [12] at the rate of £100 s% War Loan for each £95 nominal value 5% National War Bonds surrendered ; 4 /o Bonds into 4% War Loan 1929-42 [13I at the rate of £100 War Loan for each £100 nominal value National War Bonds surrendered. Denominations, £50, £100, £500, £200, £1,000 and £5,000. Issued in both coupon and registered form; also in registered coupon bonds. Payable: 5% Bonds due in 1922 at 102; due in 1924, at 103; due in 1927. at 105. The 4% Bonds are payable at par. 15. Second Series offered at par April i, 1918 to Sept. 30, 1918. Total sales about £493 million. Terms same as first series. Payable: 5% Bonds due m 1923 at 102; in 1925, at 103; in 1928, at 105. 4% Bonds payable at par. 16. Third Series— Total sales about £40 million. Offered Sept. 30. 1918 to Jan. i8' 1919; 5% bonds at par and 4% bonds at £101 los. Payable: 5% ^onds due Sept. I. 1923 at 102, Sept. i, 1925 at 103. Sept. i, 1928 at 105; 4% bonds due Sept. I, 1928 at 100. Other terms and conditions, same as first series. 17. Fourth Series— Total sales about £596 million. Offered Jan. 31, 1919 to May 31. 1919; 5% bonds at par; 4% bonds at £101 los. Payable: 5% bonds teb. i, 1924 at 102, Feb. i, 1929 at 105; 4% bonds Feb. i, 1929 at 100. Te^ms and conditions same as first series, except this series has no conversion right into War Loan. 18. 4% Funding Loan:— Original issue about £409 million. Offered at 80 June 12 to July 12, 1919. Sinking Fund of 2H% on the nominal amount of the loan originally created set aside semi-annually and any balance remaimng after payment of interest applied to the purchase and cancellation of bonds if obtainable at or under par. See item 34. Receivable on the basis of 80 in payment of deatn duties if held by the deceased for six months prior to death. Exempt from taxation in the hands of persons neither domiciled nor ordinarily resident in the Um ted Kingdom. The interest (dividends) on bonds held by persons not ordina.nly resident in the United Kingdom will be paid free of tax without regard to domiale of owner. Coupon and registered (either inscribed stock or registered certificate). Bearer bonds in denominations of £50, £100, £200, £500, £1,000 and £5.000. 19. Victory Bonds:— Original issue about £360' million. Offered at 8s June 12 to July 12, 1919. Bonds are entitled to the benefit of a Sinking Fund of 2}i% of the nominal amount of bonds orginally created. See item 34. Tax exempti9n8 as in (18). Receivable at 100 on same basis as (18) in payment of death duties. After payment of interest, the balance of the fund is apphed to the redemption of bonds by lot on Sept. i of each year. See item 34. Tax exemptions as in (18). Receivable at 100 on same basis as (18) in payment of death duties. Bearer and registered Bonds, but interest in all cases payable by means of Coupong attach^ to bonds. 20. Exchequer Bonds:— First introduced by Mr. Gladstone in 1853. At present there are six series of these bonds outstanding; the five series described in the table and the new series described on page 33. The bonds of all issues are pay- able to bearer and are in denominations of £^0, £100, £200, £500, £1.000 ^d £5,000 except there are no £200 bonds in the 3% issue of Jan. 28, 1930. The Ex- V 214} m i». I m |g|; BANKERS TRUST COMPANY 23. 24, chequer Bonds may be registered either as inscribed stock or registered certificate. ih^cVkf'f^X ']?'^? ^^ '^^ ?^°i ?^^^ ^'■^ receivable in payment of death duties. Hilf °^^^" ^'" ^^ ^^ received in payment of excess profit duties and muni- wi? r!^^?"%PI'",^''^ ""^ ^^^^S^'?^ conditions as those attached to the National l^^f^Ji^tr. T^^^^ldera of sH% issue due 1925 may give notice during tiie w^oo? •'^°* i^eitiier of the years 1921. 1922 or 1923 requiring repayment of the i^iM ^in^J^^ "^•'^^ ^^^; ^° ^^^ y^'' '^^.^ suceeding that in whiS such notice ArSl^ ^y^^^^ ^P' arcumstances may notice once given be subsequentiy with- t^b?^o I^mnH^Jf' °o''^ ^^ ''^?^'' f'S^P^ ^^^ ^^^» concerning which there appears to De no exemption, same as item (18). *'* I^.t^J^Jii^^t^^i"^'*! ^?"^ ^'^' ^9^5. a scheme was put into operation under hul^^^^^^""^ °/ England was prepared to receive applications daily for Tr^su^ biUs to mature at various dates up to twelve montiis after date of issue, but the W u'hw^nJ''"" "^^^ suspended on Jan 3. 1917. On March 30. 1917! the^le of Tuie T^ rnr^^'^T ^^^^^^d ^^t the last issue under this system was made on IfTJu'df^'^i'^J^^J^^^^^ J"°^ ^5. 1918, while on June 18. 1917. the method wh^n JoS^ ^^ ^^ '^^J^r?^ reverted to. and was continued until May 30. 19 19. ^Itl^^^^^ T^^ suspended for some weeks. On July 15. 1919, biUs were again ^^' Fvlf fcf^^'"?. ?uTJir''V^^''~^H^ ^"""^ ""i ^^^^ Certificates was commenced j«^^*^^/^' ^^ ^^^ ^H°^ ^Ss 6d. for every £1 certificate, repayable at par free of income tax in 5 years from dates of issue. See also page 25; ^ " *" **'' *'*''' '^^^ °' 2l^?\^;^^'{^'^t^ LiABiLiTiES:--These comprise sundry liabilities under the Tele- S^tects ^ ^^ ^''^' ''^^''' ^""'^ ''^^' ^^"^^ ^*^'^ ^^^«' and several SS^JiJ-fn'SfnY'^"^'' States GovERNjiENTr-The British Finance Accounts do not give details in regard to this indebtedness. The report of the Secretary of Treasury of the United States presented to Congress on Nov. 20 loiostatS that the total advances of the British Government to Nov. 15. 19^^ Iggregatld S?^^^^^ ?^or^- ^-^ ^^^^^' ^^ ^^^ Secretary of the Treasury to th^ ^nafe^dated Mi^^^^ ^IWt^'"^^^^ "^^^^""^ 2^ I64.164.000. The accrued unpaid int^^t to March 10 was reported to be I21 1.828.890. "tcxcoi, w ^r^c^^^^^??-^'^-^.'T'^^!f ^^"^ for lsoo.000.000 offered in New York. Oct. 14 K^JJn^Af rl^!,^'^^ and several obligation of the Governments of the United Kingdom of Great Bntain and Ireland . and the French Republic. Principal and in- terest are payable in New York City, in United States gold coin wShout^eductiiSi for any present or future British or French taxes. Coupon Bonds ^ndenomii^^^^ TZ^.iJr'"' f500 and $1 000 may be registered as to princij^l rIS^ Ponton a«H'''''^-'l^^!??l°^i''.^^ ^J^'^^^*' ^^^ ^50.000 and authorizcd multiplS^ Coupon and registered bonds interchangeable. Convertible at the option of the noJ l/t^r^'fh't^'^f ^ r^ ^^^^' \^^ ^P"^ ^5' ^92^ °^ (provided that notice b^ given not later tlmn April I5. 1920) at maturity par for par into 14-25 year joint and several 4^% bonds of the Governments of the United Kingdom of Great Britain and Ireland and the French Republic. Such 4^^% bonds will be^paj^b^pri^^^ and interest in United States gold coin in New York City free frSm^edu?tiSn for any present or future British or French taxes. They will matu?rOctTJiolo iWrZ^H^t/^^f ™^t^^^ f^ P^;;^^^ ^^^^^^ interest ^n whX or in ^'rt on X' interest date not eariier than Oct. 15. 1930 upon 3 months notice. *^ *- "" ^^^ Secured Dollar NoTEsi—Part of an original issue of liso.ooo.ooo made in ?.!T ^^''i^ ^°''- '• '^'^ principal and interest payable in New York in United m^pnf 1?^!?/''.^'' ^^ ^^% ''^^'' °f ^^^ S°^^.^^ ^^ London in steriing at the fixS rate of I4.865 to the pound. Free of any British taxes present or future. R^eem- t^Af'''' ^""J^^^ °°^'^^ ^^°?J N°^- I' 1919 to Oct. 31. 1920 at 102, and iSSSt ^'^l^f^'V^''''- ^» ^^2^ ^° ^^^' 31. 1921 at loi and interest. Secured by plldle with the Guaranty Trust Company of New York of securities approved by Me1«ra lu^t^^'i^V" ^Th °*r ^'^'''^ ^ ^.^'^^^ ^^\"\°^ ^°^- °^^^ ^h^ par value of thf n^tes outstanding. The Government may sell the collateral at any time and apply the proceeds of sale to the retirement of the notes by purchase or redemption by lot! 25. ENGLISH PUBLIC FINANCE [215 27. 3- Year Convertible Notes: — Issued in New York, Oct. 23. 1919 at 98 and interest. Offered in conjunction with 10 year convertible bonds (28) 1250,000,000 in all. Denominations lioo. Isoo, and li.ooo. Interest and principal payable in New York in United States gold coin, without deduction for any British taxes present or future. Convertible at the option of the holder at par and interest into National War 5% Bonds fourth series fiy), sterling exchange being computed for the purpose of conversion at the fixed rate of I4.30 to the pound. Conversion may be made at any time prior to Nov. 21, 1922, notice to be given prior to Sept. i , 1922, of intention to convert. The converting note holder will be entitled to receive £232 12s principal amount of such National War Bonds for li.ooo of principal amount notes surrendered. 28. 10- Year Convertible Gold Bonds: — Offered in New York with (27) Oct. 23, 19 19. at 96 J^ and interest. Principal and interest payable in New York in United States gold coin, free of any British taxes present or future. Coupon bonds in denominations of |ioo, $500. li.ooo. registered as to principal. Convertible at any time prior to Feb. i, 1929. For terms and conditions see above, No. 26. 29. 20-Year Gold Bonds: — Issued Feb. i, 1919 in exchange for 2 year secured notes of the United Kingdom which matured on that date. Principal and interest payable in New York, in United States gold coin or in London at the fixed rate of I4.86S, free of British taxes, present or future. Denominations, coupon bonds, lioo, I500 and |i,ooo, principal registerable. Registered bonds li.ooo, Is.ooo and lio.ooo, coupon and registered bonds interchangeable. 30. Other Debt Created under War Loan Act: — ^^ Other debt is taken to include all borrowings outside this country, with the exception of the first American Loan raised in November, 1916, under the American Loan Act". [The Anglo- French ssl (Economist, Apr. 3, 1920). In the table the amount due in and to the United States has been segregated with the possible exception of around £12 million due for Treasury Bills sold in New York. Of the sum remaining the Monthly Review for March, 1920, of the London Joint City & Midland Bank estimates ap- proximately £150 million to be due to other foreign countries — including Argentina. Uruguay, Japan and other neutrals; the balance probably represents amounts due to the Dominions. 31. Grand Total of Direct Debt: — ^The authority for this total and for some of the items is a table given in the London Economist, Apr. 3, 1920, page 730. 32. Guaranteed Loans: — ^Any liability in connection with these loans is apparently remote as all the foreign loans are a charge upon certain revenues of the nations whose bonds are guaranteed. The local loans are secured by the assets of the Local Loan Funds which are supported by local taxation. The Irish Land Pur- chase Bonds are secured by the Irish Land Purchase Funds. TRANSFER REGULATIONS 33. Transfer and Other Regulations: — ^The Bank of England and the Bank of Ireland act as fiscal and transfer agents for the British Government debt. Transfers; — Transfers of Government securities can be made without charge from the books of the Bank of England to the books of the Bank of Ireland or vice versa . Transfer days, Monday to Friday, inclusive, free of charge; Saturday upon the payment of a fee of 2s 6d. Stocks (Registered bonds, American parlance) are transferred in multiples of a penny (a) on the books of the Bank, in which case the owner has no documen- tary evidence of ownership (such stock is known as inscribed stock) or (b) by deed, in which case the owner receives a certificate by the Bank of England in the following form: "This is to Certify that (blank) is the registered proprietor of (blank amount) registered (here follows the title of the Loan)'*. Bearer Cou- pon Bonds are obtainable in exchange for inscribed stock or stock transferred by deed, in the case of most issues. Registered Coupon Bonds are issued in the same demoninations as Bearer Bonds. A Certificate of ownership similar to (b) above is issued to which Coupons for interest are attached. Each Registered Coupon Bond is transferable by deed but only in its entire amount. )ii: 2l61 BANKERS TRUST COMPANY iiii' \' H Dividends: — Cheques for dividends on inscribed and registered stocks are mailed to the owner. All business in regard to transfers must be conducted at the Bank of England or the Bank of Ireland in person or through a banker or other agent. The banks will not carry out any of these operations by correspondence, SINKING AND DEPRECIATION FUNDS 34. Sinking Funds:— OW Sinking Fund (38 and 39 Vict.) consisting of the surplus, if any, of income over expenditure for any year, of which the Treasury in the course of the next financial year shall cause to be issued out of the Consolidated Fund, or the growing produce thereof, at such times during that year as they may from time to time direct. The Old Sinking Fund is to be issued to the National Debt Commissioners and applied by them in the same manner as the New Sinking Fund, except that it may be employed in paying off advances made by the Bank of Eng- land or the Bank of Ireland in pursuance of Section 12 of the Exchequer and Audit- Act, 1866, but not in paying off any loan borrowed under any Act to meet way a and means. New Sinking Fund (38 and 39 Vict.) consisting of such portion of the permanent annual charge for the Natiorual Debt as is in any financial year not required for the purpose of paying the annual charges. This is to be issued from time to time to the National Debt Commissioners and be applied by them, within six months after the date of issue thereof, in purchasing, redeeming, or paying off any one or more of the following descriptions of debt — ^namely. Annuities (perpetual or termin- able) charged on the Consolidated Fund, and Exchequer Bonds and Exchequer Bills (whether held by the public or on account of the Exchequer, or sent into the Bank of England for payment) ; but the New Sinking Fund is not to be applied in paying off any advances made by the Bank of England or the Bank of Ireland in pursuance of Section 12 of the Exchequer and Audit Act, 1866, or in paying off any loan borrowed under any Act to meet ways and means. (See Application of Sinking Funds, below). An Annuity of £is,547 created under the National Debt (Conversion of Stock) Act, 1884, to extinguish the increase in the nominal capital amount of the National Debt due to conversion of 3 per cent. Stock into 2M and 2^ per cent, stock, and expiring in 1934. Application of Sinking Funds, The Finance Act, 1915, makes Sections 3 and 4 of the Sinking Fund Act, 187S (which relate to the application of the Old and New Sinking Funds), applicable to any securities issued under the War Loan Act, 1914. or any Act extending or amending that Act or any other enactment authoriz- ing money to be borrowed for the purpose of the present war in like manner as they apply to annuities charged on the Consolidated Fund. Depreciation Fund for 4% and 5% War Loans. (Items 12 and 13.) The follow lowing regulations have been made by the Treasury respecting the Depreciation Fund for 4 per cent, and s per cent. War Loan. Under Section 32 of the Finance Act, 1917: — (i) There shall be established a fund to be known as the "Depreciation Fund, " under the control of the National Debt Commissioners. (2) The following sums shall be paid to the fund from time to time under the direction of the Treas- ury: (a) In respect of the six months from 17th February, 1917, to i6th August, 191 7. an amount equal to six-eights of i per cent, of the total nominal value of the Stock and Bonds of the 4 per cent. War Loan, 1929-1942 and the s per cent. War Loan, 1929-1947. originally created; (b) in respect of each succeeding month an amount equal to one-eighth of i per cent, of the total nominal value of the said Stock and Bonds; provided that no payment- shall be made to the fund in respect of any period during which the unexpended balance of the fund amounts to £10,000,000. (3) The moneys standing to the credit of the Depreciation Fund shall be applied from time to time by the National Debt Commissioners in the purchase of Stock or Bonds of 4 per cent. War Loan, 1929-1942, or s per cent. War Loan, 1929-1947. whenever the market price of the Stock and Bonds of these issues is below the respective issue prices — ^viz., £100 and £95. (4) The Stock and Bonds bought on behalf of the Depreciation Fund shall be cancdfled in the same manner as Stock or Bonds bought for the Old and New Sinking Funds. (5) The ENGLISH PUBLIC FINANCE [217 National Debt Commissioners shall, out of moneys standing to the credit of the Depreciation Fund, purchase for that fund any Stock or Bonds of the 4 Per cent.- War Loan, 1929-1942, or the 5 per cent. War Loan, 1929-1947. purchased out ot funds standing to the credit of any Government Account between the 17th i^ebru- ary, 191 7, and the passing of the Finance Act, 1917, in anticipation of the establish- ment of the Decpreciation Fund. (6) Any sums standing to the credit of the lund. and not required for the immediate purchase of such Stock or Bonds as aforesaid, may be invested by the National Debt Commissioners in Treasury Bills, or in advances to the Treasury of sums which the Treasury may borrow for the Purpose of raising any sum which they are authorized to issue out of the Consolidated Fund under any Consolidated Fund Act or Appropriation Act. (Up to the 15th March, 1919, the amount issued out of the Exchequer for the Depreaation I^und was £62,180,513.) Sinking Fund for 4% Funding Loan and Victory Bonds. (Items 18 and 19). His Majesty's Government undertake to set aside at the close of each half-year a sum equal to 2^ per cent, on the nominal amount of the Loan and Bonds originally created. After deducting therefrom the amount required for payment of interest on the Loan for the half year, the balance of the sum so set aside will be carried to a Sinking Fund which will be applied as follows: In the case of the Funding Loan; during the succeeding half-year to the purchase of the Loan for cancellation if the price is at or under par; when the price is above par it will be either so applied or otherwise invested under the control of His Majesty's Treasury. Any outstanding balance of the Loan not previously redeemed will be repaid at par on May i, 1990, but His Majesty's Government reserve to themselves the right, on giving three calendar months notice m the London Gazette, to redeem at par at any time on or after May i, any outstand- ing balance of the Loan not previously purchased and cancelled by the operation of the Sinking Fund. In the case of the Victory Bonds; by annual drawings to the redemption of the Bonds at par (including Bonds which have been surrendered to the Commissioners of Inland Revenue for death duties as hereinafter provided), the Bonds to be redeemed in each year determined by lot and paid off on September i in such year in accordance with regulations made by the Treasury. The numbers of the Bonds drawn for redemption on each occasion will be advertised in the London Gazette not less than two months prior to the date of redemption. Interest on Bonds drawn for repayment will cease from the date on which the Bonds become repayable. The first drawing will be that for the Bonds to be redeemed on September i, 1920. AUTHORITIES The sources from which the above tables and notes have been compiled are Finance Accounts for 19 19, the Stock Exchange (London) Daily Official List, official cir- culars so far as obtainable, the Stock Exchange Oficial Intelligence, vol. 38 — for 1920. The Economist and The Bankers Magazine (London). 2i8l BANKERS TRUST COMPANY ENGLISH PUBLIC FINANCE [219 QUOTATIONS Consols and Bank of England Stock 1697-1919 QUOTATIONS— Con/znt^^i Consols and Bank of England Stock 1697-1919 For dosing years of historical periods and yearly from 1X57. f\Jk^ fXlt,\X Jr\: ;^ May 99 Jan. 100.5 3.0 291 284 1766 90 Jan. 87 Feb. 88.5 3.4 140 134 H 1883 102^ Feb. 99H July 101.4 2.9 302 288 1775 90 Jan. 87 July 89.6 3.3 146 140 H 1884 102^ Apr. 9SVs Dec. lOI.O 2.9 312 294 1785 71 Dec. 55 Feb. 59.7 5.0 130 112 H 188s lOlH May 9A% Apr. 99.3 30 309 289^ 1792 (c) 96 Mar. 76 Dec. (g) 90.0 (g)3.3 216 175 H 1886 102^ Nov. 99^ Jan. 100.8 3.0 299 291 1802 76 Apr. 68 Jan. 70.9 4.2 195 180 ■ 1887 103^ May 99 Ji Feb. 101.8 2.9 308H 294 1817 84M Dec 62 Jan. 75.3 4.0 (0) 294 220 1 1888 IO3H Mar. 98H Dec. lOI.O 2.9 332 303 1833 9IM June 84^ Jan. (h) 87.7 3.4 2I3>^ 190 1 1889 99M Jan. 96H Sept. 98.0 2.8 346 320 1842 97 Jl Dec. 88>^ Jan. (i) 92.0 3.3 173 165 H 1890 9m May 93^ Nov, 96.3 2.8 ZAO% 327 1847 93^ Jan. 7SH Oct. 87.2 3.4 206H 180 1 1891 97H Jan. 94% June 95.7 2.9 343 323 1854 9SH Sept. 8SH Mar. (J) 91.9 3.3 221 204H 1 .1892 96^ Dec 93^ Jan. 96.7 2.8 344 32s 1857 94H Jan. 8614 Oct. 91.9 3.3 222 209 1 1893 9SH June 9S% Sept. 98. 5 2.8 344 327 1858 98K Oct. 94^ Jan. 96.9 3.1 230 217 1 1894 102H Dec. 97^ Jan. lOI.I 2.7 (s) 343 325 1859 97^ Dec. SSH Apr. 95.1 3.1 231 215 1 1895 108H Sept. 103H Jan. 106.2 2.6 338H 322 i860 95 K Jan. 92H Oct. 94.0 3.2 235>^ 225 1 1896 II3H July 105H Jan. no. 7 2.5 336 322 1861 94M Nov. 89H July 91.5 3.3 241 226H 1 1897 113^ May iio^i Mar. 112. 4 2.4 328 325 1862 9AH July 9iyB Jan. 93.0 3.2 (p)244 232 H ■ 1898 113^ Jan. 106 5i Oct. no. 9 2.5 351M1 326 1863 94 May 90 Dec. 92.6 3.2 240 232 H 1899 lllH Jan. 975i Dec. 106.9 2.6 (r) 361 H 325 1864 92 May 87H Sept. 90.1 3.3 244 234 H 1900 103^ June 965^ Dec 99.6 2.7 349 326 186s 9iy2 June 86M Dec. 89.5 3.3 250 238^ ■ X901 97 Ji Feb. 91 July 94.2 2.9 342 320 1866 90H Dec. 84^ May 88.0 3.4 253 240 H 1902 97^ June 92H Dec 94.4 2.9 Z2(>% 323^ 1867 96H June 89K Apr. 93.0 3.2 264 239 H 1903 93^Vr6 Apr. 86^ Apr. 90.7 2.7 33l>4 311 1868 96H May 91^ Jan. 93.9 3.2 251 240 I 1904 (d) 91 H June 85 Mar. 88.2 2.8 316 295^ 1869 94M June 91M May 92.9 3.3 246 235 1 1905 9i^tr« Mar. 87^ Jan. 89.8 2.8 308 29l>^ 1870 94^ May 88H Aug. 92.5 3.3 ■ 1906 9i>i Apr. 85^6 Oct 88.3 2.8 301 268 1871 94 July 91^ Dec. 92.7 3.3 1 1907 87».l6 Feb. 80^ Aug. 84.1 2.9 288>^ 255 1872 93H May 9i>^ Dec. 92. 5 3.3 1 1908 SSH Mar. 835.6 Dec. 86.1 2.9 (t) 285 258)^ 1873 94 May 91M Dec. 92.5 3.3 H 1909 86 Apr. 82Vii Oct. 84.0 3.0 279 256 1874 93^ 95H May Nov. 91H 91% Dec. Jan. 92.5 93-7 3.3 3.2 (r) 261 262 'sf 1 1910 83^ Jan. 78^^ Dec. 81.0 3.1 272 250 187s * ' 220] BANKERS TRUST COMPANY ENGLISH PUBLIC FINANCE [ 221 QUOTATIONS— Continued Consols and Bank of England Stock 1697-1919 For closing years of historical periods and yearly from 1857. Consols Bank of England Year Price Average (k) Yield Price High Month Low Month Price % High Low 191 1 S2% April 76% Sept. (i) 79.3 3.1 263M 242H 1912 79l^ Feb. 72H Oct. 76.1 3.3 251 234 1913 75^ Mar. 71 Dec. 73".^ 3.4 251 224H 1914 77"/l6 Feb. 69^ July 74"^ 3.3 256 234 1915 685^ Jan. 57 Nov. 65.5 4.1 249^ 230 1916 615^ June 535^ Dec. 58.0 5.2 230^ 194H 1917 S6Vs Oct. 51 Feb. (e) 54.0 4.6 205 190 1918 63H Oct. 53^ Mar. 58.2 4.3 226 I9ili 1919 60 Jan. 49^^ Sept. 55.0 4.5 (U) 224^^ 186^ (a) These quotations are not for Government Stock but for the stock of the Million Bank," an investment trust whose funds were invested in Government stocks. The quotations probably give a better idea of the true market than would quota- tations for Government annuities. The first quotation is for 1700 the firat year in which the Million Bank stock was quoted. The dividends paid by the Million Bank in these years were at the rate of 5%. Scott. W. R.. Vol. II. See Authorities. (b) (1739-1785) Rogers, J. E. T. "History ot Agriculture and Prices Vol. VII., Part II . (c) (1792-1903) Mabson— "The Statist's History of the Public Debt." (d) (1904-1919) Investors' Monthly Manual. (e) Average of high and low only. , _ , ,^ «* ..tt- ^ * (f) (1 739- 1 785) Average of daily prices as recorded in Rogers. J. E. T. History ot AgricultureandPrices"Vol. VIL, PartlL ^, ^. ^ ^, . c;ik».««« (1792-1817) Average of the mean of the monthly high and low prices. SilDerling, N. J. in Harvard Review of Economic Statistics, Oct. 1919. Van Sommers, James. Tables, London, 1848. .,,,., ^ ^,1 (i842-i847)(i9ii-i9i6) Statistical Abstract for United Kingdom Average monthly (S) (i) 0) (1854-1910) Average and yield. Williams, T. T. "Journal of Royal StaUstical Societv " ]March 191 2 (k) Except where otherwise noted the yield is obtained by dividing the average yearly price into the rate of interest. This rate was 3% from 1739 to Apnl 5. 1889. then 2li% to April 6, 1903 and since then 2H%. (1) (1697-1701) Scott. W. R., Vol. IL See Authorities. « ^ tt (m) (17 14) Rogers. J. E. T. "History of Agriculture and Prices" Vol. VIL. Part II. (n) (1739-1802) Sinclair Vol. II. See Authorities. .,..,«,. j (o) (1817-1861) Francis. John— History of Bank of England— "Its Times and (p) (1862-1869) Thom's Irish Almanac and Official Directors' of the United Kingdom of Great Britain and Ireland, (r) (1874-1893) (i 899-1907) Investors* Monthly Manual, (s) (1894-1898) Stock Exchange Official Intelligence, (t) (1908-1918) Mathieson's Hand- Book for Investors, 1919. (u) (19 19) Investors' Monthly Manual. . (v) High and low prices. The months given for the high and low pnces of the year arc those in which the price first or urred. In some years these same pncci wcr* reached several times. QUOTATIONS LONDON STOCK EXCHANGE British Funds Calendar Years H L H L H L H L H L H L H L H L H L H L H L H L H L 1910 1911 1912 1913 1914 1915 1916 1917 1918 1919 Name 2'A% (Goschen) 1923 Money. (Int. Jan., Apr., July, Oct.) . . 2K% (Childers). (Int. Jan., Apr.. Jul.. Oct.) 23^% Money (Int. Jan., Apr.. July. Oct.) . . 3H% War Loan, red. 1925-28. (Int. Mar., Sept.) 4K% War Loan, red. 1925-45- (Int. June, Dec.) 5% War Loan, red. 1929-47. (Int. Jun. Dec.) 4% War Loan, red. 1929- 42. (Int. Apr.. Oct.) . 4% Funding Loan 1960-90. (Int. May, Nov.) 4% Victory Bonds (Mar., Sept.) . . . National War Bonds First Series 5% (Apr.. Oct.). Oct., 83X 78^ 87 813^ 76 H S2% 76^ 89 803^ 74H 79% 72K 82M 73K 76M 70M 7S% 71 78K 74K 73M 67% 77% 69K 80K 74% 74 M 67M 68K 57 76K 59K 65M 54 9SK 89K 99^»/l'6 96X 61K s6K 62K 533^ 59^ SO 90K 83 97 ^^/fe 92K 66^ 50K 56Vr6 53K 533^ 48 87^ 83*/l6 lOI^ 89K 96K 92K 63K S3K 6IK 53^ S9H SoH 89X 85 ioi}4 98K 96M 92^ 103^ 99 J^ 60 49 Ji 60K SoH 56 H 46H 89K S4H ioo}4 83 K 96% 89^»/r6 103 • • • • • 98% t ***** 78K 74 ssH 79 H lOI ...*.< 97 1922 5% (Apr.. Oct.). Oct.. lOiX 96H 1924 5% (Apr.. Oct.). Oct., looK 9SH 1927 4% (Apr.. Oct.), Oct. looK 97H 1927 1 r 222] BANKERS TRUST COMPANY ENGLISH PUBLIC FINANCE [223 w. QUOTATIONS LONDON STOCK EXCHANGE (Continued) British Funds Calendar Years 1910 1911 1912 1913 1914 191S 1916 1917 1918 I9I9 Name Second Series 5% (Apr., Oct.), Apr., H L H L H L H L H L H L H L H L H L H L H L H L H L H L H L H L H L 100^ 96 1023 S% (Apr., Oct.), Apr., • • ■ • • 96K 100 5^ I02S S% (Apr., Oct.). Apr., 1028 9SK 4% (Apr., Oct.), Apr., 100^ 97K 1028 Third Series S% (Mar., Sept.), Sept., y 1 /^^ 100 J^ 1023 9SJ^ 100^ 5% (Mar., Sept.), Sept., .• 1025 96 M S% (Mar., Sept.), Sept., looK 1028 95^ 4% (Mar., Sept.), Sept., • • • • • 100% 1028 97H Fourth Series s% (Feb.. Auk.). Feb., lOOl^ 1024. 9SM S% (Feb.. Aus.). Feb., 100^ 1020 97^ 4% (Feb.. Auk.). Feb., lOOl^ 1020 97 Exchequer Bonds 3% Jan., 1930. (Int. Jan.. Apr., Jul.. Oct.) 83 79"/f6 83 8l»V6 looH 99 lOOj^ 99 5i lOI 99^ I02j^ 100^ S3l4 70M 3% Jan.. 1030. (Int. 1 y/* 83 Jan.. July) ..... • • • • • 78 s% Dec. 1020. (June. 1 ** loiV^ Dec.) 08 S% Oct., 192 1. (Int. 100 J^ Apr., Oct.) .... 97Vii S% 1919-22, Apr., 1022. ioo5^ (Apr.. Oct.) .... 96 6% Feb., 1920. (Feb., Aufi:.) loiH ■ ooH , ^vrvr^O QUOTATIONS LONDON STOCK EXCHANGE (Continued) British Funds Calendar Years Name 3^% Guaranteed, I933 (issued under Irish Land Act). (Int. Jan., July) 2K% Guaranteed 192 1 (Int., Jan., July) . . 3% Guaranteed, red., 2 Dec, 1939. (Int. Jan., July) 3% Local Loans, 1912. (Int. Jan., Apr., July, Oct.) 3% Met. Police Deb., 1920. (Int. Jan. .July) 3% Egyptian Gua. (Int. Mar., Sept.) 195 1 • 2^2% Greek Gua. Loans (Int. Apr.. Oct.) 1898 3% Mauritius, 1940. (Int. Jan., July) . SK% Sudan Govt. Gtd. Bds. (Int. May, Nov.) 3% Transvaal Gua. 1923-S3 Money. (Int. May, Nov.) 3% Transvaal Gua. red. I July, 1958. Int. Jan., July) 4% Turkish Gua. (Int. Feb., Aug.) 18SS . • Bank of England . . . Div. %, Apr. S . . . Div. %, Oct. 5 . . . Bank of Ireland. . . . Div. %, Feb. i . . . Div. %, Aug. I . . . H L H L H L H L H L H L H L H L H L H L H L H L H L H L 1910 1911 84M 79"/i« 84 79K 92 88 96H 92)^ 93 91K 995^ 5. 84K 76^ 83^6 76H 92^ 83^ 94K 1912 ^8 8SH I. ^4 94 91K 73 79^ 74H 86K |3. I9I3 I9I4 94H 93"/(« 97 K 92K 84K 82 91^ 89K 90X 82 94M 92^ 9SH 88 84 79M 87M 87^ 95K 91K 94"/i6 91K 106K 102K 272 250 9 9 314K 293 12 96 K 9S"/l6 91K io6^^ 102 K 263 242M 9 9 303 269 12 12 93^^ 92K 88K 104K lOlK 251 234 9 9 28o>^ 240 II 10 76'/l6 69^ 76K 70!^6 82K 7SM 87K 8i^i6 96 92K 90K 88 87^ 87^ 79^ 69 1915 1916 ''4 72j^ 91 K 86^ 74 89K 81^ 97 95 9SK 89 K 80^ 78 92^ 92^ 95 88^4 67K 65M 68M 66K 74X 71M 8i>< 78K 94M 89 90 87K 75K 75 1917 65^ 50X 6oi»/l6 3. 91 94M 86X 87K 102K I03K 99K lOlK 251 256 224K 234 9 10 9 10 243 240K 215 222M 10 10 10 xo 90 88 9oy 86 71K 54^/^6 78^ 57K 9IK 72K 68 75V16 65 73 71 1918 56 51 71 55 61^ 55 61X 56K 93X 90> 69M 66K 75K 66K 249K 230 10 10 230^ 182K 10 10 88K 62K 86 63 97 75 230K I94>^ 10 10 200K 172 10 10 68 63K 66 63 79K 72 205 190 10 10 195 170 10 10 63 (>zy2 563^ 67 1919 66^ 58M 97^ 94 72^ 66^ 80 74 71 69^ 70K 67 H 70 63M 83^ 71 226 191K 10 10 223 190 10 10 583^ SiH 63 53K 64 S4K 645^ S5K 99K 98H nz% 61 8 79 69K 64K 74^ 70)i 73H 62 70 62 87K 74 224^ 186^ 10 10 226 204 12 12 1 iri 224] BANKERS TRUST COMPANY ENGLISH PUBLIC FINANCE [225 f QUOTATIONS LONDON STOCK EXCHANGE (Continued) British Funds Calendar Years Name 3K% India, 1931 Money. (Int. Jan., Apr., July, Oct.) . 3% India, 1948 Money. (Int. Jan., Apr., June, Oct.) 2^% India, 1926 Money. (Int. Jan.. Apr., July, Oct.) . 3M% India Bonds. 1916-18. (Int. Apr., Oct.) 3K% Indian Rupee Paper. (Int. various dates) 3H% Indian Rupee Paper, 1854-5. (Int. June, Dec.) 3% Indian Rupee Paper 1896-7. (Int. June, Dec.) 3K% Isle of Man. (Int. Feb., Aug.) 3% Isle of Man Deb.. 19 19-29. (Int. Feb., Aug.) H L H L 1910 94^ 92^ 84K 79K 1911 H JoVs L 66 H L H 63K L 621^ H 64 L 62^ H 53 L 52 H 96^ L 96^ H 88^ L 88^ 97H 91 84^ 78 71 65H lOlK 99^»/i6 64^ 64^ 633^ S2K 52 97«/l6 97K 87K 85K 1912 94^ 89K 80K 76^ 67K 63K I00"/l6 99K ■^8 63H 64^ S4J4 96K 96M I9I3 I9I4 91^ S4% 78X 71 65 60X lOOH 98K 64 64>< 63 54 53^ 94 94 93K 84 80K 71^ 66K 59 8x =^8 63K 64"^6 63X S3K 53K 99 191S 1916 SsVs SoH 69X 60 J^ 57 lOoV^ 96 61% 54 62K 52 49K 48K 99f< 96 80^ 63M 69^ 54K 57^ 46H 91^% 54K 48 Ji 55 48K ASH 43K 96% 89 I9I7 I9I8 69 >i 62X 74 61K 6o>< S3K 64 53 SO 45K 53 J^ 44% 98K 96^ 99K 99X S3 42M S3K 43 52K 42% 54 43 38M 99*/l6 89K 41K 41K 99»/i6 97K 80K 80 79X 77K I9I9 715^ 60 6iJ^ 50^ 51^ 43K 68 48K 68K 48K 58 43 99K 97 Authorities for Quotations 1910-1919, Investor's Monthly Manual — London. Stock Exchanges London and Provincial Ten-Year Record of Prices and Dividends — 1909- 19 18. Mathieson, Fred C. C. & Sons, London, 1919. Mathieson's Handbook for Investors for 1920. QUOTATIONS NEW YORK STOCK EXCHANGE British Funds Calendar Years Name 5% Anglo-French syr (Int. Apr. & Oct. United Kingdom of Great Britain and Ireland 2 yr. 5% Notes 1918. (Int. Mch. & Sept.) 3 yr. 5H% Notes 1919 (Int. May & Nov.) syr, 5H% Notes 1921 (Int. May & Nov.) S%% Convertible Notes 1918 5H% Convertible Notes 1919 . . • (Int. Feb. & Aug.) SH7o 20 yr. C^ld Bond 1937 ... (Int. Feb. & Aug.) 10 jrr. Conv. sJ^s 1929 (Int. Feb. & Aug.) 3 yr. Conv. sJ^s 1922 (Int. Feb. & Aug.) H L H L H L H L H L H L H L H L H L 1914 191S 98Ji 93H 1916 96H 92>^ 99IVI6 98 y4 91% 9^ 97 1917 933^ Si% 9m 9SH 9W 93H 9m 8434 100^ 98 lOlH 9SH I9I8 9l}i I9I9 100 95H 99^ 91% 9ll4 95H 105 97^ loiH 100 J^ 99^ 94^ lOI^ 86H 96H 945^ 98H 95^ {t it . " f 226] BANKERS TRUST COMPANY MONEY RATES London Daily Average Bank Rate 1914 1915 1916 1917 1918 1919 First half .... Second half . . . £ s d 3 4 7 4 16 10 £ s d 500 500 £ s d 500 5 18 6 £ s d 560 500 £ s d 500 500 £ s d 500 560 Whole year. . . . 409 500 5 9 3 5 3 500 530 Market Rate— Three Months* Bills First half .... Second half . . . £ s d 2 10 2 3 5 3 £ 8 d 290 4 19 3 £ s d 4 17 6 5 II £ s d 4 16 7 4 15 9 £ s d 3 13 3 10 5 £ s d 3 10 4 7 9 Whole year. . . . 2 17 8 3 14 I 5 4 3 4 16 2 3 II 9 3 18 10 Deposit Rate— Banks First half .... Second half. . . . £ s d 1 14 7 2 10 £ s d 200 3 4 I £ s d 3 10 3 18 9 £ s d 400 400 £ s d 320 300 £ s d 300 3 7 9 Whole year. . . . 224 2 12 3 14 4 400 3 I 3 3 3 10 Short Loans First half . Second half . Whole year. £ 2 2 s d 2 7 5 II 4 3 £ s d I 12 II 4 3 9 2 18 4 £ s d 4 5 II 4 19 6 4 12 8 £ s 4 II 4 5 d o 6 483 £ 3 3 s d 6 2 4 II 356 £ s d 3 4 7 3 14 7 3 9 7 TREASURY BILLS Discount Rate Date 1917 June 19 Dec. 27 1918 Feb. 14 1919 May 31 July 14 Oct. 6 Nov. 7 Maturity 3 and 6 months bills u u u f« ii 11 Sales discontinued 2 months bills — (Sales discontinued August i s) 6 « « 3 6 3 and 6 months bills. For further data about Treasury Bills, see Item 21, page 214, also Index. ENGLISH PUBLIC FINANCE [227 SOVEREIGNS OF ENGLAND From the Conquest Reign Reigned, Reign Reigned Sovereign began years Sovereign began years Norman Linb Mary I 1553 5 William the Conquerer 1066 21 Elizabeth 1558 44 WlUiam Rufus 1087 13 House of Stuart Henry I hoc 35 James I 1603 23 Stephen ii3S 19 Charles IJ 1625 24 Commonwealth declared House of Plantagenet May 19. 1649 ZO Henry II iiS4 35 Oliver Cromwell Richard I 1189 10 Lord Protector 1653-1658 John I 199 17 Richard Cromwell Henry III 1216 56 Lord Protector 1658-1659 Edward I 1272 35 Charles II 1659 96 Edward II 1307 20 James II§ 1685 3 Edward III 1327 SO WiUiam III ' Richard II* I377 22 and Mary II ► 1689 6 House of Lancaster Anne 1702 za Henry IV I399 13 House of Hanover Henry V 1413 9 Henry Vlf 1422 39 George I George II 17 14 1727 13 33 House of York George III 1760 S9 Edward IV 1461 22 George IV 1820 ZO Edward V 1483 William FV 1830 7 Richard III 1483 fl Victoria 1837 63 House of Tudor House of Kent Henry VII 1485 24 Edward VII 190 1 9 Henry VIII 1S09 38 House of Windsor Edward VI IS47 6 George V 1910 •Deposed 1399 tDeDOsed ia6i tBeheaded 1649 §Deposed 1688 228] BANKERS TRUST COMPANY ENGLISH PUBLIC FINANCE [229 ^r II I I ;1 Authorities The statements contained in this book are for the most part based upon official data, chiefly derived from the fol- lowing publications: — Period Revenue, Expenditure, Currency and Debt 1688- 1 869 House of Commons Sessional Papers, Vol, XXXV, i868'6q, No, 366. This monumental work of H. W. Chisholm gives complete data in regard to revenue and expenditure and the debt. 1870-1919 1919 and 1920 Finance Accounts, See page 161. Budget Speeches as printed in various publications; also semi-official data tabulated in The Economist and The Statist. 19 14- 19 19 Committee on Currency and Foreign Exchanges After the War — Lord CunliflFe, Chairman. First Interim Report — C. 9182, 1918. Final Report — C. 464, 1919. The Debt 1 694- 1 786 History of the Earlier Years of the Funded Debt, A. T. King. House of Commons Sessional Papers, 1898. Vol. 52 — C. 9010. 1 786- 1 890 Proceedings of the Commissioners for the Reduction of the National Debt, House of Commons Sessional Papers, 1801. Vol. 48— C. 6539. 1836-1914 National Debt, House of Commons Sessional Papers, 1914. Vol. 50 — C. 7426. Similar statements are published an- nually. Revenue, Expenditure and Debt of secondary sources the most valuable have been AsHTON, John— ^ History of Eng- lish Lotteries, London, 1893. The best authority. Atton, Henry and Henry Hurst Holland — The King's Customs, New York, 1908. Covers from earliest times to 1800. Bogart, Ernest L. — Direct and Indirect Costs of the Great World War, Carnegie Endowment for International Peace. New York, 19 19 Brisco, Norris a. — The Eco- nomic Policy of Robert Walpole, New York, 1907. A finished study; the best for the period. Dowell, Stephen — A History of Taxation and Taxes in England, from the earliest times to the present day, London, 1884. The authoritative work on the subject. Freeman, Edward A. — The Growth of the English Constitu- tion from the Earliest Times, London, 1906. GiFFEN, Robert — The Growth of Capital, London, 1889. An excellent study of national wealth. Hall, Herbert — The Antiquities and Curiosities of the Exchequer. London, 1891. Supplements Madox. See below. A History of the Custom Rev- enue in England to 1827, 2 Vols. London, 1885. Mr. Hall is one of the most thorough students of early fiscal methods. His history of the Customs is the best authority. Hamilton, Robert — An Inquiry Concerning . . . the National Debt. Edinburgh, 181 8. A scientific study. Hamilton deserves the credit for convincingly demonstrat- ing the fallacy of Pitt's sinking fund. A concise, authoritative exposition of the subject. HiGGS, Henry. The Financial System of the United Kingdom, London, 19 14. "A summary exposition of our financial system, its organization, methods, and forms of procedure." Hughes, A., Crump, C. G., and Johnson, C. **De Necessaries Ob- servantiis Scaccarii Dialogus,*^ commonly called Dialogus de Scaccario, by Richard, Son of Nigel, Treasurer of England and Bishop of London, Oxford, 1902. Supplements Madox. A recent and very thorough study. Lowell, A. Lawrence — The Gov- ernment of England. 2 Vols. New York, 1912. The best authority on English govern- mental methods. Madox, Thomas— r^^ Ancient Dialogue Concerning the Ex- chequer. London, 1758' The best authority on the earliest his- tory of English public finance. Poole, Reginald L. — The Ex- chequer in the 12th Century, Oxford, 1912. Supplements Madox. Ramsay, Sir James H. of Bampf. The historical works of this author cover the period of English history from B. C. 55 to A. D. 1485. He gives particular attention to matters of finance, and is perhaps the best author- ity on public finance from 1154. when the first records become available, to 1485. He is reputed to be very accu- rate. Scott, W. R. — The Constitution and Finance of English, Scottish and Irish Joint-Stock Companies to 1720, 3 Vols. Cambridge, 1910-1912. An extremely valuable study. Vol. Ill contains data in re Crown finance in the time of Queen Elizabeth, not to be found elsewhere. ScROGGS, W. O. — English Fi- nances under the Long Parliament. Quarterly Journal of Economics. May, 1907. An important study. SiLBERLiNG, NoRMAN J. — British Financial Experience, 17 go- 1830. In The (Harvard) Review of Economic Statistics, October, 1919. An excellent study of commodity prices, wages, prices of gold and silver, ex- change, and interest rates. 1 ' ,' il (i, 230] BANKERS TRUST COMPANY Sinclair, Sir John — The History of the Public Revenue of the Brit- ish Empire, 3 Vols. London, 1803-04. The authority on the history of Crown and national finance to about 1801. Treats also of early borrowing methods. Stamps, J. C. — British Incomes and Property. London, 1916. The Wealth and Income of the Chief Powers. Journal Royal Stat. Soc. July, 1919. Probably the most scientific and au- thoritative studies which have been made on these subjects. Stubbs, William — The Constitu- tional History of England in its Origin and Development (1066- 1485)- 3 Vols. Oxford, 1880. The standard work on the English Constitution. Invaluable. Williams, W. M. ].—The King's Revenue. London, 1908. An excellent guide to a correct under- standing of Treasury and budget state ments. WiLLOUGHBY, Wm. F., and Westel , W.; McCuNE, Samuel Lindsay. The System of Financial Admin- istration of Great Britain. New York, 191 7. Describes particularly the English bud- get system. Banking Andreades, a. — History of the Bank of England. London, 1909. The acknowledged best authority. Bagehot, Walter — Lombard Street. New York, 1912. For administrative methods. BisscHOP, W. R.—The Rise of the London Money Market^ Lon- don, 1910. Of especial value in connection with the genesis and history of the private and joint-stock banks. Francis, Joseph Hume — History of the Bank of England. Chicago, 1888. For human interest notes. HoLDEN, Sir Edward H. — ^Annual addresses to Shareholders of the London Joint City & Midland Bank. These very able addresses were deliv- ered at the annual meetings, 19 15 to 19 19 inclusive. Palgrave, R. H. Inglis. — Bank Rate and the Money Market^ New York, 1903. An invaluable study of the banking re- serves and discount rates from 1845. Philippovich, Eugen von — His- tory of the Bank of England. Washington, 191 1. For relations to the Exchequer. Authoritative. Powell, Ellis T. — The Evolution of the Money Market. London, 1916. A study of finance as a central co- ordinated force. Rogers, James E. — The First Nine Years of the Bank of Eng- land. London. The standard authority for the period covered. Withers, Hartley — The English Banking System. Washington, 1911. A concise review prepared for the Na- tional Monetary Commission. War and Lombard Street. Lon- don, 19 1 7. For emergency measures adopted at outbreak of war. The Economist, The Statist, and The Bankers' Magazine, London, have been of the greatest value, particularly for the war period. Index and Glossary Where no page number is given the subject is not treated in the text. Acceptances, Use of, 8; How mar- ket was protected in 1914, 8 Accounting Officers of Exchequer, 160 Aid, 66 — See Scutage, taxation Aids, Feudal, 61 Alfred, King, 57 Allies and Dominions, Loans to March 31, 1920, Table, 34 American Securities, Mobilization of, 1914-1919, 24 American War — See War Amsterdam, Bank of, established 1609, 92, 177 Anglo-French Loan, 24; See also Debt Table, 214 Anglo-Saxon King?, Finances, 57- 59 Anne, Queen, 103 Annuities, loi Antiqua Custuma, i.e., The an- cient and equitable duties, 65 Assessments, Monthly, 67 Assets — National, 21 Assize of Arms — A medieval term. Under the assize every freeman was required to provide himself with arms and armor according to his means and rank and to stand ready for military service. Australia— Cost of War, 1914- 1919, I Auxilia — A medieval tax on ten- ants B Banco del Giro, 176 Banco della Piazza del Rialto, 176 Bank Charter Act of 1844— 5ee Bank of England, 195 Bank of Amsterdam, 177 Bank of England: — Advances to Government on Credit of Ways and Means, 42; Bank Act of 1844, terms of, 195. I97i sus- pension of in 1847, 1857, 1866 and 1914, 198; Bank Rate — Effect of in regulating money rates and the exchanges, 171, normally controls money rnar- ket, 171; Branches, 194; Build- ing, 204; Bullion Report 1810, 189; Capital — original, 181; Charter granted July 24, 1694, 87; Charter Act of 1844, 194; Clerical machinery, 203; "The Court," 203; Committees, 203; Crises, i8th Century, and the Bank, 1 83 ; Directors — How elected, 200, personnel, 200, cannot be professional bankers, 201, committees of, 203, court of, 203; Early History, 180; Exchequer — relation to, 158; First bank in modem sense, 169; Fund of Credit idea, 102, 181; French War, Great, and the bank, 185; Functions — acts as banker to nation, 158, 170, 182, carries, reserves of other banks, 170, conducts general banking busi- ness, 169, issues bank notes, 169, mobilizes national credit re- sources, 171; Fund of Credit, 102, 181; Government of, 200, committees, 201, clerical ma- chinery, 203, directorate, 200; Governor and Deputy Govern- or — How selected, 200, change every two years, 202, duties, 202 ; Loan from Bank of France in 1839, 196; Note issue — rights in England practically exclusive, 169; Notes made legal tender in i833» 194; Officers, 202; Origin, 1 231 I' 232] BANKERS TRUST COMPANY ENGLISH PUBLIC FINANCE [233 180; Privately owned, 181; Privileges and obligations under Act of 1844, 197; Quotations for stock, 218; Reserves — ultimate banking r. of nation held, 170; Reserves — rule in re prior to 1844, 195; Reserves in 1S39, 196; Rest (reserve) estab- lished 1722, 194; Restriction Act, 1 87 ; Resumes specie payments in 1821, 190; Rule for Conduct of business prior to 1844, 195; Statements required, 194, com- ment of the Economist thereon, 195; Stockholders liability, 194; Specie payments suspended 1797 -1 82 1, 186, effect on ex- changes and prices, 188 Bank of France: — Founded in 1800, 196; Loan to Bank of England in 1839, 196 Bank of Genoa or Compania (Casa) di San Giorgio, Origin dates from 1148, 177 Bank of Ireland, 158 Bank of Venice or Banco del Giro, Founded 1619, 176 Banks, Country — failures in 1793, 124, 184 Banks, Irish, 170, 206 Bankers — Italian, and Plantagenet Kings, 173 Banking — Italian corporate banks — early, 176 Banks, Joint-stock — Introduced in 1826, 88, 192; Privilege extend- ed to London 1833, 88. English forbidden to issue notes, 191, 192, 197; Number of banks still having privileges in 1919, 192; Number and resources in Dec, 1919, 193 Bank credits — How created, 43; How they helped to finance war 1914-1920, 39; Reserves vs. Credits, 40 Bank Reserves— V5. Credits, 1914- 1920, 40; Ultimate carried in Bank of England, 170; Scotch, 170, 206 Bank Statements — not required in England except by Bank of England, 194 Banks or Partnerships of more than 6 persons forbidden in 171 1 to issue notes in England, 191; In 1826 restrictions removed (until 1844) on banks located 65 miles from London, 192 Benevolences, 70 Bona Vacantia, 62 Boer War, 36 Borrowing — See Debt Brig-bote, 57 British Empire, Cost of War to, 1914-1919, I Budget, 154 From the French hougette, a little bag in which the Chancellor of the Exchequer kept his papers. Adopted in England in 1763 when the annual statement of the plan of supplies and means was first called "opening the Budget." Budget (1920-1921), 18 Bullion Report, 189 Burg-bote, 57 C Canada — Cost of War to, (1914- 1919), I Capital Levy urged in 1715, 116 Chamberlain, Austen, 18, 19, 20, 22, 27, 35 Chancellor of the Exchequer — Ancient times, 150; Modern times, 154, 156. See Chamber- lain, Austen; Gladstone, William ; North, Lord; Pitt,William; Wal- pole, Robert Charles I — Government without Parliament, 81 Charles II, 78, 81, 82; Army dis- banded, 83; Clergy .V consent to be taxed by Parliament and obtain right to vote at elections, 84; Dutch wars, 84; Excise Taxes, 84; Fire of London, 84; French loan makes him inde- pendent of Parliament, 85; Seizes deposits of Goldsmiths, 75; Parliament ends Dutch war by withholding supplies, 85; Plague, 84; Poll tax — greatest known — classes affected, 83 ; Stop of Exchequer, 75, 85, 179; Rev- enue — loths and I5ths aban- doned for monthly assessments, 84; Permanent revenue given in lieu of prerogative rights, 84 Charters: Magna — extorted from King John in 12 15. The great charter of the liberties of Eng- land, 54, 66, 77; See Taxation: Aids, Customs, Escheats, Scut- age, Purveyance. Mercatoria — published in 1303. The Magna Charta of Commerce. The basis of the free trade system, 77 Chisholm, H. W., Monumental re- ports on debt and revenue, 131, 228 Church, The, Revenues derived from, 69; Spoliation of bv Henry VIII, 70 Circulation, Bank Note: English, 191, 192; Bank of England, 195- 199; Joint-stock banks, 192; Private banks, 192; Irish banks, 206; Scotch banks, 206 Civil Government, Cost of, 1833- 1920, 143, 144, 145 . Civil Rights, Revenues and civil rights, histories bound together, 54 Civil War Period, 1 649-1 660, 81 Clergy: Supplies voted from own estate until time Charles II, 84; Obtain right to vote at elections, 84 Coinage: Debasement as source of revenue, 63, 70; Debased by Edward I, Edward IV, Henry VIII, 70, 71; Irish — debased by Elizabeth, 71 ; Restored by Eliz- abeth, 70; Restored by William 111,71 Commerce, Foreign, Anglo-Saxon, Commons: First admitted to share in taxing power (1295), 77; Certain revenues voted yearly to insure control of government, 136; Right to initiate money legislation becomes a precedent in reign of Henry IV, 79; Wil- liam III and, 136 Commonwealth and Protectorate ( 1 649-1 659): A period of active training for self-rule, 81; Cost of government high, 82 Compania di San Giorgio, 177 Compera del Capitalo, 177 *' Consols," 122, 2X1 Constitutional Government: De- veloped by control of purse un- der Plantagenets, 77; Lancaster and York, 78; Tudors, 79; Stuarts (earlier), 79; Common- wealth and Protectorate, 81; Stuarts (later), 82; William III, 55 Continental Policy, Napoleon's, Stimulated home trade of Eng- land, 187 Contributions — See Revenue Corn Laws repealed, 89 Cotton Trade, How financed, 1914, II Credit, Letter of, reign of John, 174 Credit, National, High sense of national honor at base of na- tional credit, 135 Credits, Loans to Dominions and Allies, March 31, 1920 — ^Table, 35 Credit Structure: In War, 1914- 1920, 45 Cromwell, 81 I Uj L I i i I '*i; i II t i* i 234] BANKERS TRUST COMPANY Crown Colonies, Cost of war to, 1914-1919, I Crown Finance, 1066-1688, 54 Crown Lands, 69 Crown Jewels Pawned for Debt, 72 Crusades and Italian bankers, 173 Cunliffe, Lord, Committee on Cur- rency and Foreign Exchanges,42 Currency and Foreign Exchanges after War, Committee on, 42 Currency: Joint-Stock Banks de- prived of right to issue notes in 1844, 197; Note and Deposit — actual and per capita, 191 3- 1919, Table II, 48; Note and de- posit vs. Gold reserves, Table III, 50 Currency Notes — See Treasury Notes Customs, 64; Anglo-Saxon, 59; Antiqua-Custuma, 65; Farming, 172; Free Trade — absolute since 1866, 89; Charta Mercatoria, 77; Informal, 66; Magna Charta, defined, 65; New Customs (Nova Custuma), 65; Old (Antiqua- Custuma), 65; Oldest branch of revenue, 65; Origin, 59, 64; Prisage — two casks of wine from each cargo, 65; Protective Tar- iffs, 66; Subsidies, 65; Tariffs to promote and regulate commerce, 66; Tariff reform, 141; Tunnage and Poundage, 65 D Dane-geld, 58 Debt, Crown: Compulsive loans, 74; Crown jewels pawned for debt, 72; First recorded, 72; Foreign borrowing, 75; Interest payments (usury) interdict in medieval times, 72; Henry VIII repudiates, 73; Security given — ^form of, 73; Stop of Exchequer 75 Debt, National: Ability to carry due to progress of the arts and sciences, etc., during i8th and 19th Centuries, 38, 133, 149; American War (1775- 1783), 1.091 Amount at close of historical periods, 1688-18 17, 93; 181 7- I9I9» 37 J Annuities, loi, ton- tine, 102; vs. Bank Assets, 45; Began in 1688, 86, 91, 94; Bur- den, Comparative, 1688-18 17, 132, 134; 1688-1920, 18, 166; 1817-1914, 148; 1817-1919, 36, 37; Cause, chiefly war, 89, 91, 128, 137, 163, 166; Charge vs. National Income, 37, 134, 148; Competitive bidding for loans, inaugurated by Pitt, 123; "Con- sols," origin, 1749, 122, 211; Consols, quotations, 1697- 1920, 218-221; Credits to March 31, 1920, 35; Debenture — copy of one in reign of John, 173; East India Co., 103; Exchequer Bills, 87> 98, 99; Exchequer bonds, 213; Exchequer order and tallies, 96; Floating debt — 178^, 122; 1920, 31, 33; Foreign securi- ties mobilization, 1915, 24; French War Debt, 124-135; "Funded'' and "unfunded'* debt defined, 94; Funded, early forms, loi; Fund of Credit, 102; Loans to Dominions and Allies, March 31, 1920 — ^Table, 34, 35; Lottery Loans, 108; Lot- teries, State, 113; Loyalty Loan of 1796, 126; Maturities of debt on Dec. 31, 1919, 30; Navy sup- ply bills — manner of issue time Charles II to 1784, 122, 123, discount in market, 1687, 98, method of issue reformed by Pitt, 122, funded by Pitt in 1785 and 1786, 123; Origin, 86; Paying for the War bonds, 41; Reduction, Proposed 1920-192 1, 31, 32; Refunding and reduction ENGLISH PUBLIC FINANCE [23s of interest, 1749, 121, 1784, 122, 1817-1914, 146, 1920-1921, 32, 33; Sinking fund: Walpole*s, 1717, 116, after 1727 inopera- tive for debt reduction, 117; Sinking Fund, Pitt's, 1 786-1 829, 117, fallacy of, 118; Sinking Funds, Modern, 119, 216, old, 216, new, 216, war debt, 1914- 1920 (known as depreciation fund for 4% and 5% War Loans; sinking fund for Victory and Funding Loans), 21, 31, 216, 217; South Sea Company, 20; Status, Dec. 31, 19 19, 20, March 31, 1920, complete des- criptive tables, 208-217; Spanish and Austrian Wars debt (1739- 1748), 91, 93; Terms on which loans were placed, American War, 109-113, Great French War, 125, 126, 131, Great World War, 1914-1920, 23-29, 41, 212- 215; Transfer regulations, 215; Treasury Bills, 9, 14, 33, 87, 214; Treasury Bonds, 33; Un- funded debt defined, 94, early forms of, 96 — army and navy supply bills, 98 , exchequer bills, 98-100, exchequer bonds, 213, exchequer order, 97, tallies, 96, treasury bills, 9, 14, 214, ways and means advances, 42, 212; War Debt, 1914-1920, 23; War Savings Associations, 19 14- 1920, 25; vs. Wealth, 1688-1817, 93;i8i7-i9i4, 148 Demesne^* — Domain, 57, 61. See Prerogative Discount Rates — Money, 1898- 1914, 4; 1914-1919, 226 Dominions and Allies — Loans to, March 31, 1920, 2, 21 ; Table, 35 Dominions: Expenditures for War, 1914-1919, I, 2; Per cent, met by taxation, 3 (< East India Company, 103 Edward the Confessor, 57 Edward I: Coinage Debased, 70; Commons admitted to share in taxing powers in 1295, 77; Laws codified by, 77; Tunnage and Poundage originate in reign of, 65 Edward III: Default on obliga- tions to Italian bankers, 175; Necessity for revenue gives Par- liament opportunity to obtain concessions in exchange for grants, 78; Poll tax first laid in 13375 Tenths and Fifteenths originated in his reign, 67 Edward IV, Coinage debased, 70 Edward VI, Foreign loans, 75, 79, 175 Elizabeth, Queen, Foreign loans, 75, 175; Lottery, 108; Coinage restored, 70; Sanctions base coinage for Ireland, 71; Debts — father, brother and sister paid. Estate duties, 69 Exchequer (The public Treasury) — Ancient Accounting system of, 150; Anglo-Saxon, 60; Bud- get, 1 54; Chancellor of, 156; Con- solidated fund, 157; Depart- ments and officials, 156; Emer- gency measures, 19 14, 6; Ex- penditures, 1688-18 17, 136, 138; 1 688-1920, 166; and Bank of England, 181; Modern, 155; Norman period, 54, 60; Receipts, 1688-1830, 136, 140; 1688-1920, 164; Tallies, 152; Treasury, 153; and Bank of England, 158 Exchequer Bills: First issued 1696, 87, 98; Reign of William III, 100, 185; Largely super- seded by Exchequer bonds (1853), 213; and Treasury bills (1871), 14, 214 ' I t V 236] BANKERS TRUST COMPANY Exchequer Bonds, 213 Exchequer Order and Tallies, 96, 97 Exchequer, Stop of, 75, 85 Excess Profits Tax — See Taxation Excise Taxes: Introduced from Holland in 1643, 67; of Charles II, 84; French war period, 139 Expenditure, 2j4 centuries vs. six years, 17; Character of, 1817- 1914, 142; Civil — increase after each war, 138; Civil Govern- ment, 1817-1914, 143; Distri- bution, 1833-1914, Table, 145; Debt charge, increasing burden after each war, 137; Debt charge, 1817-1914, 142; Mili- tary steadily rises, 137, 142, 144; Principal objects of, 1 688-1 920, 166; War chief cause, 89; 1688- 1830 for alternate periods of peace and war, 138; 1688- 1920, 18, 166; Military — 1816-1914, 142; 1915-1920 — ^Table, 17 Exchanges, Foreign, Working of, described, 8 Export Merchants, Advances to, in 1914, 10 Extortions — Forms of, practised by early kings, 69 Factor, The King's, 175 Fairs, Anglo-Saxon and Norman, 59 Farm (or Ferme), Farmmg cus- toms, how done and why, 172 Federal Reserve Banks — U. S. carry ultimate specie reserves of all banks, 40 Ferme — See Farm Feudal system: Aids, 61; Anglo- Saxon, 57; Knights service, 62; Norman system of land tenure, 61 "Finance Accounts," 68, 161 Finance, National: Dutch ex- perience a valuable asset to William III, 92; Germs of modern financing methods found in early practice, 68 Financial conditions in July, 191 4, 4 Fines, 62, Extortionate, 70 Fiscal system today: Accounting officers, 160; Bank of England, 158; Bank of Ireland, 158; Bud- get, 154; Exchequer, 155; Chan- cellor and Aids, 156; Consoli- dated Fund, 157; Financial Re- ports, 161; Paymaster-General, 159 Flemish merchants. Loans to Edward VI, Mary and Eliza- beth, 75, 175 Folk-land, 59 Foreign investments, 5 Foreign securities. Mobilization of, 24 Forests, The King s, 61 Forest laws, 61 Free Trade — See Customs, 77, 89 Fumage. See Taxation, 68 Fund of credit, 102, 181 Genoa, Bank of (Ufficio di San Giorgio), Cartulary notes — Character of business, 177 George, David Lloyd, 5 "Giro payments'* defined, 176 Giro, Banco del (Bank of Venice), 176 Goldsmiths, The, 178, 182 Grants. See Aid. Great Britain — See United King- dom Gresham, Sir Thomas, King's fac- tor, 175 H "Hearth-money^" 66 Hereditary revenues. See Prerog- ative, 61 ENGLISH PUBLIC FINANCE [237 Henry H: Exchequer records date from his reign, 54 Henry III : The first king of Eng- land whose debts are recorded, 72 Henry IV, 79 Henry V, 73 Henry VHI, 70, 73, 74, 79 "Here-geld," 57 Hide — of Land: A medieval meas- ure of land — ^about 100 acres, 58 Holden, Sir Edward H, 11; proc- ess of payment for government loans described, 41 Hearth tax, 58 "Heavy horse," 113 House duty, 68 I Income, National: Defined, last H, 147; 1688-1817, 132, 134; vs. Debt Charge, 134; 1817-1914, 148; 1920, 3. Invisible trade balance, 5 Income tax — See taxation. First modern, 1799, 88, 142 India, Cost of war to, 1914-1919, I, 21 Inflation, High prices and bank credits, 49; By bank deposit credit, 1914-1920, 13; Methods of — used to finance war 19 14- 1920, 13; One measure of, 52; By notes, bank and treasury, 13, 47; Prices vs. Physical volume of trade, 49 Interest: Charge for, forbidden in medieval times, 72; Payment forbidden by Church, 72; Pay- ments in lieu of, 72, 76, 172 "Issue" — English Treasury term for "payment" Italian Banks, Early corporate, 176 J James I, Financial methods re- viewed, 80, 81 James II, 85 Jews, Taxation of, 66 John: Debenture of, 173; Letter of Credit of, 174 John, Magna Charta (1215), 54. 77 Joint-Stock Banks— 5e^ Banks, Joint Stock K Kemmerer, E. W., Physical vol- ume of trade, 1913-1919, 49 Kindersley, Sir Robert, 27, 28 King: Demesne, 57; Factor, i75;vs. People, 54, 55; Prerogative, 61 Knights Service, 62 Labor, Labor Party, Importance of correct attitude, 90 Lancaster and York, Period of, 78 Lands: Crown — See Demesne; Taxation of — See Taxation Letter of Credit— A.D. 1201, 174, originated in Italy, 172 License fees — See Taxation "Light Horse," 113 Lombards, 178 Loans — See Debt, National London Joint City & Midland Bank, 31 Long Parliament (1640-1653), 67; Post-Office inaugurated by, 68 Lotteries — See also Debt, National; First in England (1569), 108; Last (1826) 115; Private lotteries illegal but flourish, 114; State lotteries, 113, 115 Lottery Loans, 109 — See Debt, National Lottery Tickets, 144 M Magna Charta — See Charters Mary, Queen, 75 Merchants, Anglo-Saxon times, 59 Million Bank, 103 238] BANKERS TRUST COMPANY Mobilization of Foreign Securities, 24 Monopolies, 70 * ' Monthly Assessments ' * — intro- duced by Long Parliament, 67; See Taxation Moratorium (1914), 7, 11, 12 N Napoleon, Continental Policy — Result to England, 187 National Debt— 5^^ Debt, Na- tional Navy Bills, 98, 122— See Debt, National Newfoundland, Cost of War, 1914- 1919, I New Zealand, Cost of War, i Nicholson, Prof. J. Shield, 45 Norman Period, 57 North, Lord, Financial Methods in American War, 1 1 1 Northcote, Sir Stafford H., 148 '*Nova Custuma," i.e., New Cus- toms — See Customs, 65 O "Omnium," 112 Paterson, William, Proposes or- ganization of Bank of England, 180 Paym.aster General, 159 Peel, Sir Robert, Brings about sep- aration of Banking and Issue departments of Bank of Eng- land, 196 "People," Definition of term as used herein, 54 People vs. King, 54 Peruzzi, Italian bankers, ruined by Edward III, 175 Personal Property, Taxation, dates from reign of Edward III, 67 — See Taxation Pipe Rolls ("Rolls of account" in text), 54 Pitt, William, The younger: Chan- cellor of Exchequer, 1784, 122; Competitive bidding for loans and army supplies inaugurated by, 123; Income tax, modern, originated by in 1799, 88; Methods used in financing French War, 125, 127, 185; Navy Bills funded by, 123; Re- called in 1804, 128; Death of, 1806, 128 Plantagenets, Development of Con- stitution under, 77 Pole, William de la, 175 Poll-taxes, 66; of Charles II, 83— See Taxation Post-office, Introduced by Long Parliament, 68 Pre-emption — See Prerogative, 62 Prerogative, King's, 61; Aids, 61; Benevolences, 63; Bona Va- cantia, 62; Coinage, 63; Con- tributions, 63; Demesne, 57, 61; Estates, unclaimed, 62; Estrays, 62; Extortions, 63; Feudal Aids, 61; Fines, 62; Fish, large, 62; Forests, 61; Forest laws, 61; Idiots, Custody of, 62; Loans, Compulsive, 63; Monopolies, 70; Knight's service {See also Scut- age), 62; Pre-emption, 62; Pri- sage of wine {See New Customs), 65; Purveyance, Anglo-Saxon, 58, Norman times, 62; Queen's Gold, 63; Treasure trove, 62; Trinoda Necessitas, 57; Wrecks, 62; Surrendered by Charles II, 84 Prices, Index Number, 1913-1919, 51 Prices and Bank Credits, 49; vs. Physical Volume of Trade, 49 Public Debt— ^ee Debt, National Public Expenditure — See Expendi- ture ENGLISH PUBLIC FINANCE [239 Purveyance: Anglo-Saxon, 58; Norman times to 1688, 62; See Prerogative Q Queen's gold, 63 Quotations: Bank of England Stock, 1697-1919,218; Consols, 1697-1919, 218; War issues, 1910-1919, 221 R Ransom: King Richard's, 68. See also Feudal Aids under Pre- rogative. Reserves: Specie, 19 13-19 19 — Table, 50 Restriction Act, 187 Revenue — National, 136; Aver- age annual, 1 688-1 830, 140; At historic periods, 1 688-1 920, 164, See Debt, Prerogative, Taxation Revolution of 1688, dividing line between old and new England, 55, 86 Richard I, Income tax first levied by, 68 Richard II, 75, 78 "Scrip," 113 Scutage, C'Escuage," derived from "escu" (French), a shield; a sum of money paid in lieu of service of the shield, i.e., of knight's service (62)). An early form of land tax, 66. Ship-geld, 58. See Taxation. Sinking funds: Walpole's, 116; Pitt's, 117; Modern, 14, 21, 31, 119, 216 Social betterment, expenditure for, 144, 165 South Sea Company, history, pur- pose and scheme of, 104 Stamp duties, first imposed in 1671,68. 5e^ Taxation. Stock Exchange loans, how pro- tected 1914, 10 Stuart and Cromwellian period, one of transition from autocracy to democracy, 79 Stuarts, last of autocrats, 79 Sudsidy: Customs, 65; A form of tax, 66. See Customs; also Taxation Tally — (talea — a slender staff, a rod, stick, stake, bar), 152. See Debt — national — unfunded, 96; "Tallies of assignment," 96; "Tallies of loan," 96; Excheq- uer order, 96, 97 Tariff — See Customs, 89; Reform of, 1842-1914, 89, 142 Taxation: Aid (Scutage) A form of land tax, 66; Aliens, 66; An- glo-Saxon : trinoda-necessitas — brigbote, heregeld or herefare, burg-bote; also, dane-geld, fu- mage (68) or hearth-tax, horn- geld, 57, 58; Assessed taxes, 1785, 67; Brig-bote, 57; Burg- bote, 57 ; Cards, tax on, first intro- duced during reign of Charles I; Carucage — A medieval tax levied on land at so much a caru- cate, i.e., the quantity of land that could be ploughed by one plough in a season; Customs (i 154-1688), 64, 68; Consoli- dated fund, 1787, 157; "Dane- geld," 58; Estate duties, 69; Excess profits, 15, 19, 20, 69; Excise, 68; Fumage, 68; Fund, consolidated, 157; Hearth- money, 58,66,68; Here-geld, 57; House duty, 68; Income tax — most flexible, 15, first levied by Richard I, 68, first levied in modern form by Pitt in 1799-, 88, discontinued at close French «f m i!;f 240] BANKERS TRUST COMPANY Wars, reintroduced, in 1843, 142; Indirect, unknown until 1643, 67; Jews, 66; Land taxes, 66, 68; Land-value duties, 69; Licenses, 59; Laws in re must originate in Commons; Long Parliament methods, 67; Mar- riages, births and deaths; Methods in 1817-1913, 141; Moneyage — A form of hearth money originating in Anglo- Saxon times — "by way of boun- ty or recompense to the King not to alter or debase the coin' abolished by Henry I Monthly assessments, 67; Origin ot. present-day taxes, 68 Personal property, 66; Poll taxes, 66,83; Post-office, 20, 68 Pre-emption, 62; Property and income, 68; Scutage, purpose for which it could be levied, 66; Ship-geld, 58; Stamp duties first imposed in 1671, 68; Sub- sidy — customs, 65; tax, 66; Tenths and Fifteenths, 67; Transfers of stocks, 20; Trinoda necessitas, 57; Of war wealth, 19; 1914-1920, principle upon which based, 14; "Tenths and Fifteenths," 67 Tonnage Act — 1694, Bank of Eng- land organized under, 180 Trade, physical volume change, 1913-1919, 49 Treasurer — Norman times, 54 Treasury, Public, 27, 54, 153, 155 Treasury Bills, 9, 14, 87, 214. See Debt — national. Treasury Notes, also called Cur- rency Notes, Bradbury's, 7; Outstanding, Dec. 31, 1919, 30, 47 Trinoda necessitas, 57 Tudor period, control of the crown lost by the people, 79 Tunnage and poundage, 65. See Customs. U Ufficio di San Giorgio, 177 Union of South Africa, cost of war, 1914-1919, I United Kingdom, cost of war to, 1914-1919, I Usury — See Interest, 172 Venice, Bank of. Character of business, 176 "Vote'' — English treasury term for appropriation, 162 W Walpole, Robert, Chancellor of Exchequer, 116 War: American banks, how they helped finance world war, 39; Boer war, 37, 129; Debts caused by war, 91; Crimean war, 129; Cost cumulative, 138; Compari- son, 1688 to 1817,93, 136; Debts, 23; i688-i8i7,93;Expenditures, 1914-1920, 15, 17; Income, 1914- 1920, 16; Dutch, 84; French, the Great, 37, financing described, 124-140; Greatest cause of pub- lic debt and expenditure, 89 War 19 14-1920: — Summary, 1-3; Banks' part in financing, 39; Six years of war vs, 2j^ cen- turies, i, 18; Conditions in July, 1 9 14, 4; Emergency measures, 19 1 4, 6 — currency notes, 7; clearing house certificates, 7; moratorium, 19 14, [7; protect- ing acceptance market, 8; treasury bills issued, 9; stock exchange loans, 10; advances to exporters, 10; cotton trade financing, 11; success attend- ENGLISH PUBLIC FINANCE [241 ing these efforts, 1 1 ; Costs and how met, 13, 37» per cent from tax, 2, per cent from borrow- ing, 2; Credit structure and the banks— Table I, National debt vs, bank assets, 46; II, currency and deposits, 48; III, specie reserves, 50; War Loans, how financed, 41; Loans to Dominions and Allies, March 31, 1920— Table, 35 Ways and means advances: War Debt, 1914-1920, 23, 42, 45 « • Wealth, War, taxation of, 19 Wealth, National, 1914 and 1920, 3; 1 688-1 8 1 7— ^ee table, 93; 1817-1914, I47» 148; William I, 79 William III, coinage restored, 71, 75; First loans, 97; Grant for life denied, 55; Dutch financial ex- perience an asset, 87; Finance (public), in reign, 92; Lottery loan, 108; National debt and Bank of England originate in his reign, 86, 87 •■ ••' m • t * * \ * \. • • • t ■ . •• • *• «t • « at' 4 • - • • I t f • t k • ' • t • • t • « I • * • t t • « t • % 1 « • V t •. • t • t • • «> • t • • • • 'iJHBll |T A .« 11: ^^^^{|i'!" ijii!'; 1 II, pi.]) ill' COLUMBIA UNIVERSITY LIBRARY This book is due on the date indicated below, or at the expiration of a definite period after the date of borrowing, as provided by the rules of the Library or by special ar- rangement with the Librarian in charge. DATE CORROWED DATE DUE DATE BORROWED DATE DUE D694.2 Fisk, Haxvey E* F54 I English public finance from the revolution of 1688. iU^^z;^ ft) f K 06Nt NEH fEBd8l99^ 0044248075 AUG 9 1940 ■;j.T:-.7.r.;,t.'-'- .1 ( . m%'