Letters on the Sinking Fund from David Ricardo to Francis Place Author(s): David Ricardo Source: The Economic Journal, Vol. 3, No. 10 (Jun., 1893), pp. 289-293 Published by: Wiley on behalf of the Royal Economic Society Stable URL: http://www.jstor.org/stable/2955672 Accessed: 27-06-2016 09:56 UTC Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at http://about.jstor.org/terms JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected]. Royal Economic Society, Wiley are collaborating with JSTOR to digitize, preserve and extend access to The Economic Journal This content downloaded from 198.91.37.2 on Mon, 27 Jun 2016 09:56:17 UTC All use subject to http://about.jstor.org/terms NOTES AND MEMORANDA LETTERS ON THE SINKING FUND FROM DAVID RICARDO TO FRANCIS PLACE. [These letters are bound up in a volume of the Place MSS. in the British Museum (Add. MSS. 27836 ff. 113-118). The Editor's attention was directed to them by Mr. Graham Wallas, who is engaged on a memoir of Francis Place. The fund referred to is the second sinking fund, established in 1786 by Pitt after the abolition of the first (1716-1786). Much interest had been excited by an attack on the principles of this fund, in An Inquiry into the Rise, Progress, etc., of the National Debt, by Dr. Robert Hamilton, 1814 (reprinted in Macculloch's Collection of Scarce Tracts on the National Debt). Ricardo had dealtwith the question in his Essay on the Influenceof a Low Price of Corn, dc., p. 48 (1815), and Place had since 1814 kept up a constant agitation on the subject by means of anonymous letters and articles in the Morning ,Chronicle and other papers. In 1820 Ricardo was, with some difficulty, induced (according to Place) to write the article on ' The Funding System' for the Supple- ment to the Encyclopedia Britannica which appeared in 1824. In 1829 the Sinking Fund was finally abolished.] GATCOMBE PARK, MINCHINHAMPTON, NYovember 1st, 1819. DEAR SIR,- My object, as well as yours, is the discovery of truth; and therefore there is no occasion for apology on either side for freely commenting on each other's opinions. You say, that you do not make a distinction between a Sinking Fund provided by taxes, and a Sinking Fund borrowed, but that in both cases there is nothing but delusion. 'To a Sinking Fund borrowed,' you say, ' that there has been no other kind since 1793.' Now I cannot agree to this; I wish to ask whether during a portion of the time from 1793 to the present day, there was not, in consequence of that which you deem an unfounded and delusive name, less debt contracted than there would have been if no such name had existed. Twenty millions, for example, were required for the extraordinary expenses of 1796. Besides a million a year for interest, ?200,000 per annum were also provided, by taxes, for what was improperly called Sinking Fund. Suppose this to go on for several years, say ten years, is it not true that we shall, at the end of those years, be less in debt, than if we had No 10.-VOL. III U This content downloaded from 198.91.37.2 on Mon, 27 Jun 2016 09:56:17 UTC All use subject to http://about.jstor.org/terms 290 THE ECONOMIC JOURNAL continued our expenditure of twenty millions, and had provided only one million per annum for interest. it is demonstrable that the difference of our debt would be precisely equal to the sum which ?200,000 per annum, for ten years, another ?200,000 for nine years, another for eight years, and so on, would amount to, at compound interest, in ten years, and therefore in comparing these two modes of providing for expenditure together, it conveys no erroneous idea to say, that we shall owe less in one case than the other, by all the amount of the Sinking Fund and its accumulation. Strictly speaking there is no fund, for there can be no fund, anid no accumulation, while we are in debt. All that is received is applied to the payment of debt, or to prevent the contracting of it; but still, it is correct to say that the difference between A and B is equal to all the accumulations which a fund of any named amount would yield in a given time. Now suppose the Sinking Fund to be borrowed every year, then, indeed, you may justly say that the whole is a delusion; for it may be demon- strated that with a given expenditure you will be just as much in debt at the end of ten, or any other number of years, without, as with a, Sinking Fund. Is there not a very marked difference between the effects of one or other of these Sinking Funds? Yet your language would lead us to suppose there was none, for you say ' that neither in the one case nor in the other is there anything but delusion.' Suppose Mr. Pitt's plan to have always been fairly acted upon, and I should ask any of its supporters what benefit we had derived from it in diminishing or in preventing the accumulation of debt, would he not be correct if he showed me the amount of stock standing in the names of the commissioners, and told me that but for the operation of the Sinking Fund, the nation would really have owed that amount in addition to the unredeemed debt ? How, then, can you call the whole a delusion? I say the delusion is in ministers not having performed what they promised-they did not provide what they have always called a Sinking Fund from the taxes, but have for the last few years not only borrowed the Sinking Fund on the loan which they have created, but have not even provided the interest for them, and therefore it has become necessary to take the interest from the Sinking Fund. I hope now I have made myself understood; I concede to you that there is no real fund, nor can there be, while we are in debt, but that no delusion will arise from considering the Sinking Fund as a real fund, if we wish merely to make a comparison between the actual state of our debt, with a certain provision to check its accumulation, and its state if no such provision were made. You deny that Mr. Vansittart took anything from the Sinking Fund when he made his arrangements in 1813; you say ' there was nothing to take.' We will suppose a country to owe twenty millions per annum, and to consent to pay twenty-five millions per annum. It pays the five millions with the intention of arriving at a term when it shall not be called upon to pay anything, or, in other words, it prefers paying This content downloaded from 198.91.37.2 on Mon, 27 Jun 2016 09:56:17 UTC All use subject to http://about.jstor.org/terms LETTERS ON THE SINKING FUND 291 twenty-five millions per annum for a limited number of years, to, paying twenty millions per annum for ever. With the five millions per annum payments of capital are to be made, but without affording any relief to the country, which is always to pay twenty-five millions, t 11 the whole debt is paid. The first year twenty millions are paid to the public, and five millions to the commissioners; the second year ?19,750,000 to the public, and ?5,250,000 to the commissioners, and so, from year to year the payments to the public diminish, while those to the commissioners increase. Suppose that at the end of a certain number of years, seven millions only are annually paid to the public,, eighteen millions to the commissioners, and suppose at this time, the minister requires a loan of twenty millions. If he provides one million from the taxes for the interest of this loan, he will pay annually for interest and Sinking Fund on debt twenty-six instead of twenty-five millions, and though the debt will increase, the Sinking Fund will not diminish; but suppose he does not so provide the million- for interest, he will only pay twenty-five millions per annum: instead, however, of paying as before seven millions for interest and eighteen millions to the commissioners, he must now pay eight millions for interest and seventeen millions to the commissioners, and if, foreseeing that he shall want loans of an equal amount for several years to come, he should obtain an Act of Parliament allowing him to reduce the payment to the commissioners to eleven millions, and increase that to the public, by the creation of new debt, to fourteen millions, will he not have made a substantial inroad on the plan for the payment of debt ? This is what Mr. Vansittart has done, and yet you say, ' Nothing was in fact taken, nothing could be taken, because there was nothing to take.' If you say so because, strictly speaking, there is no fund, I will not dispute the matter, for it is in fact a dispute about words. What then do we differ about ? If we have not the means of paying off our debt so quickly as we otherwise should do, or, if we cannot check its increase so effectually in consequence of the new arrange- ment proposed by Mr.