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fund, from which the permanent charges on the revenue were met. The civil list, expenses of justice and the interest on the National Debt did not require to be voted annually, as did supplies for the Army, Navy and Civil Service; and Pitt argued rightly that as the credit of the country was bound to the payment of all its liabilities the separation brought only a meaningless multiplicity of accounts. If in any year the payments into the fund should be insufficient to meet the charges on it, the Treasury was empowered to make good the deficiency out of supply, replacing it as soon as the fund showed a surplus.

These administrative reforms were accompanied by a solemn effort to pay off the National Debt. Wars had raised it from £50,000,000 at the close of Walpole's administration to £273,000,000 in 1783. Of this £238,000,000 was funded debt, i.e. permanent debt which was repayable only at the option of the Government. If this rose above par, the Government was entitled to offer to debt holders the alternative of repayment at par or a lower rate of interest. Reductions on interest had been secured by Walpole. In 1749, at the close of the war of the Austrian Succession, when the credit of the Government was standing high, a big scheme of conversion was carried. The main body of debt, as it then stood, was converted from 4% stock into a new stock, which after 1757 bore interest at 3%. This stock was known as the Reduced Three Per Cents and remained in existence to 1888. In 1752 various 3% annuities were consolidated into one stock. This is the origin of Consols, the 21% Consols of to-day. At Pitt's accession nearly the whole of the debt was in 3% stock; and, as the rate at which new money could be borrowed was then between 4% and 5%, the 3% stock was well below par. A scheme of debt redemption, therefore, involved the purchase of 3% stock in the open market.

Pitt announced his plan in 1786. A body of Debt Commissioners was to receive from Parliament a million a year in quarterly instalments. With this they were to buy up stock, to hold it, and to re-invest the interest. Furthermore the payments on certain life annuities and annuities for terms of years, as they fell in, were to be continued to the Commissioners. When the annual sum at the disposal of the Commissioners reached £4,000,000, all stock subsequently purchased was to be cancelled. Pitt's purpose was to surround the scheme with such safeguards that it would be inviolable, and for the first few years of its existence it operated soundly, because the grants came out of current taxation. But the writings of the Rev. Dr. Richard Price fostered a delusion that the re-investment of interest would cause the debt to pay itself off automatically through the mysterious

efficacy of compound interest; and the delusion had injurious results when on the approach of war further borrowing became necessary.

The war which broke out in 1793, and lasted with one short intermission (March 1802 to May 1803) until 1815, affected the national finances in three ways: (i) It necessitated new borrowing, (ii) it necessitated new taxation, (iii) it imposed a strain on currency and credit. Pitt died in 1806, one year after Trafalgar but nine years before Waterloo. Pitt's part, therefore, consisted in launching war measures, which were continued under conditions of increasing strain by mediocre successors.

New Borrowing. The debt of £273,000,000 in 1783 had risen by 1816 to £902,000,000 (£816,000,000 funded, £86,000,000 floating, i.e. short-term, debt). Was the money wisely borrowed? Most of it was raised in 3% stock at a considerable discount. This meant that posterity was burdened with a larger capital sum of debt stock than if the borrowing had been done in 5% stock at par. Why then did Pitt borrow in this way? Because, in the words of Hamilton, our authority on the National Debt, ' loans are transacted in the 3%s on easier terms. The lender expects to gain by the rise of stock, and when he gains the public loses at repayment or redemption.' 1 Pitt issued a 5% Loyalty Loan in 1796, but he had to promise the subscribers that it would not be redeemed until two years after the termination of war, and that in that event holders should have the option of repayment at the rate of £133 of 3% stock for every £100 of 5% stock. Sir Henry Parnell, the Corn Law authority and financial reformer, writing in 1829, declared that if Pitt had dealt directly with subscribers instead of with loan contractors he could have combated the preference for 3% stock. But it is always easy to blame the financial middleman; and it is weak to argue, as Parnell does, that because the much smaller loans of earlier days were subscribed directly at par, therefore the huge calls on the loan market during the French wars could have been met by the same procedure.

Was the money wisely spent? The greater part, of course, was expenditure on the war-for the Army and Navy and for loans and subsidies to foreign Powers.3 The wisdom of these advances, when loans were rarely repaid, may be questioned, but this is to criticise the policy of supplying silver bullets to impoverished

1 Robert Hamilton, Enquiry concerning the Rise and Progress, the Redemption and Present State, and the Management of the National Debt of Great Britain and Ireland, 3rd ed., 1818, p. 251.

Sir Henry Parnell, Financial Reform, pp. 289-98.

3 Cf. J. H. Clapham, Loans and Subsidies in time of War, 1793-1914,' Economic Journal, Dec. 1917.

allies, and Pitt at any rate did not borrow them from another Power. However, a part of the new borrowing was devoted to the maintenance of the Sinking Fund. Between 1786 when the fund was established and 1829 when it was abolished, £320,000,000 cash was paid into the Sinking Fund Account; and during the war the whole of the contributions were borrowed. As finance this was unwise, because, though the old debt bought and the new debt issued were both mainly in three per cents., the Government by buying with the one hand and selling with the other had to pay the market charges. They could not buy as cheaply as they had to sell, and Hamilton considered that at the end of the war some £16,000,000 of debt stock had been created for which the Government had nothing to show.1

It is hard to believe that Pitt, the brilliant student of the Wealth of Nations, was deluded by the sophistry of Dr. Price. But the Sinking Fund was his darling, and how could he expect the citizens to support drastic taxation if the Government itself scrapped its solemn decision of 1786? In 1792, when war threatened, Pitt reconsecrated the Sinking Fund idea by enacting that a Sinking Fund of one per cent. should be established for all new loans. In 1802 his successor, Addington, amalgamated the new one per cent. Sinking Fund with that of 1786, with a view, he said, to extinguishing the whole debt in a shorter time than by keeping each to its own operation. But this was pretence. He wished to show that he was guarding as jealously as Pitt the financial credit of the nation. In 1813, when the stock held by the Commissioners was nearly £238,000,000-the figure of the funded debt in 1786-it was cancelled in accordance with a modification on Pitt's original scheme introduced by Addington at the time of the amalgamation. But the machinery of the fund was continued beyond the war. After 1815 it should have worked satisfactorily, but the tradition of feeding it with borrowings survived and obscured the real task of post-war finance, the raising of a true surplus through adequate taxation and economy in expenditure. In 1828 the Finance Committee showed that the provision of £5,000,000 annually for the Sinking Fund was being made by avoiding the immediate burden of other charges, such as war pensions. They recommended, therefore, that the Estimates should aim at a surplus of £3,000,000, but 'that in case the eventual annual surplus should not amount to Three Millions, the deficiency ought not to be supplied by borrowing.' 2 In 1829 the Sinking Fund was abolished. Between 1829 and 1875 Governments pursued the informal plan of devoting 1 Hamilton, op. cit. p. 198.

• Commons Committee on Finance (1828) Report, Conclusion of Report.

casual surplus to debt redemption. That such surpluses frequently accrued was due to the able finance of Peel and Gladstone. This informal plan received in later days the name of Old Sinking Fund to distinguish it from Stafford Northcote's New Sinking Fund of 1875.

New Taxation. Here Pitt, after a slow start, achieved exceptional success. A national revenue of £19,000,000 in 1793 was raised to one of £50,000,000 in 1806, the year of his death. So productive was the war taxation of 1798 onwards that if this could have been imposed at the outset with equal success the whole of the war might have been financed from current revenue. 'The great mistake committed by Mr. Pitt,' says Parnell, 'was postponing till 1798 the plan of war taxes. The paying of the whole expense of the war had by that time become a much more difficult task to accomplish than it was in 1793; because in the interval of five years between 1792 and 1798 110 millions (of principal) had been borrowed, and taxes to the amount of £5,700,000 had been laid on and permanently mortgaged for paying the interest on this new debt.' 1

Pitt certainly miscalculated the length of the war, as every Government always does; but it is very unlikely that he could have extracted from the pockets of the nation heavy sums in taxation until he had first put into the circulation of the country heavier sums through the issue of Army and Navy contracts. Moreover, he had no machinery at his disposal for the levying of such taxation. For although in 1799 the yield of the Customs was double that of 1793, even then it only rose to £7,000,000, of which £1,000,000, coming from the new Convoy Duties on exports and imports, was in a sense a charge for service rendered by the Fleet; while every extension of the Excise involved irritating control. Tradition, including the powerful tradition of Adam Smith, was against a general income tax. The land tax was now a fixed charge and so unequal in its incidence that Pitt made no attempt to restore it to its original purpose. In 1798 (38 Geo. III, c. 60) he gave landowners the right to redeem it by the payment of a capital sum which would yield to the Exchequer when invested in consols the amount of the tax plus th.2

Pitt had to find his way to an income tax along other lines. He began in 1797 with the so-called 'Triple Assessment.' There existed certain small taxes on windows, houses, shops, horses, carriages and men-servants, by which tax-payers were directly assessed. Pitt used this as a basis of a tax on spending power,

1 Sir Henry Parnell, Financial Reform, p. 288.

In 1853 the stock consideration was reduced by 171% and in 1896 changed to 30 years' purchase.

not because he wished to exempt 'hoarding' but because there existed no means of ascertaining the property of individuals except such as were of a nature that could not be resorted to.' 1 The title ́ Triple' arose from the fact that owners of establishments whose assessment the year before was £25 had their assessment tripled in 1797. Richer persons paid larger multiples, poorer persons smaller, but the assessment failed through shameful evasion. It yielded only some £4,000,000 instead of the expected £7,000,000, and Pitt was reduced to begging for voluntary subscriptions, which brought in a further £2,000,000. 'The meanness which shrank from fair and voluntary contributions has been compensated by the voluntary exertions of patriotism.' 2

In 1798 he used the lessons learned in this failure to introduce, as from January 1799, an income tax based on returns furnished by the tax-payer. Under the Triple Assessment of 1797 the person who found that his assessment exceeded 10% of his income was allowed a remission on the excess, if he filed in proof a General Declaration of Income.' Under the income tax of 1798 he filed a statement of income and had to accept without demur the amount to which he was assessed, unless he was prepared to disclose full particulars of his income from every source. There were abatements in respect of children and life insurance premiums, a total exemption to £60 and partial exemption between £60 and £200.

The tax was levied at 10% (2s. in the £) and yielded an average of £6,000,000 in 1799, 1800 and 1801. Abolished in 1802 during the brief Peace of Amiens, it was reimposed in 1803 by Addington at the rate of 5%. This was half the former rate, but the yield was nearly as great, because, though the tax-payer was now relieved of the unwelcome liability to disclose the whole of his income, he had his tax deducted at source, where this could be arranged. Thus the tenant of the land or house paid the tax due from the landlord and deducted it from his next payment of rent; and the public offices paid the tax on the salaries of their employees. This device was of enormous importance in days to come when the majority of commercial profits accrued in the form of dividends from public companies and thus became amenable to stoppage at source.

In 1806 the tax on public funds, an increasingly important item, was deducted at source for the first time. In the same year the limit of total exemption was reduced from £60 to £50, and the deduction allowed all round on children was withdrawn

1 Parliamentary History of England, II. 380. Speech of December 14, 1797. 2 Ibid. II. 429. December 3, 1798.

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