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ENGLISH
PUBLIC FINANCE

FROM THE REVOLUTION OF 1688

WITH CHAPTERS ON THE
BANK OF ENGLAND

HARVEY E. FISK

OF THE STAFF OF THE BANKERS TRUST COMPANY
NEW YORK

LONDON
SIR ISAAC PITMAN & SONS, LTD.
PARKER STREET, KINGSWAY, W.C.2

BATH, MELBOURNE, TORONTO, NEW YORK
1921

Hr/oii
F^8

DUrJ. OF INT.
RELATIONS

This book was originally issued by the
Bankers Trust Company of New York for
private circulation, and it is through the
courtesy of, and by arrangement with this
corporation, that this edition is published.

PREFACE

fillK. JF
NT. RELi

" 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 salient facts in regard to the finances of the United
Kingdom.

The earher chapters tell the financial story of the critical
period of the war from the fateful 4th August, 1914, when war
was declared, to the budget speech of Chancellor Chamberlain
on 19th April, 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 Wilham the
Conqueror. Present day financial methods are traced back
to their origins in these early days.

The activities of the Bank of England are so closely
interwoven with the operations of the Treasury that to
apprehend clearly Great Britain's pubhc finance one should
have knowledge of the history, the functions, and the opera-
tions of the Bank ; therefore several chapters have been
devoted to these matters.

Almost without exception the statements of fact contained
in this book, especially those having to do with its main
purpose — ^pubhc finance — ^are based upon a study of official
documents. Where necessary to depend upon secondary
sources care has been taken to refer only to those admittedly
authoritative.

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,

CONTENTS

Preface ....

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

Developed by Control of

THE Purse ....

XIII. England After the Revolu-

tion 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

PAGB

(1914-1920)

(1066-1688)

(1154-1688)

(1216-1688)

(1066-1688)

(1688-1920)

(1688-1817)

(1688-1707)

(1688-1727)

(1694-1826)

(1717-1920)

101

(1739-1817)

105

(1793-1817)

108

(1688-1817)

118

(1817-1914)

122

VIU

CONTENTS

XXIII. The Ancient Exchequer

XXIV. The Modern Fiscal System

XXV. Concluding Thought and Deductions

PAGB

130
134
142

THE BANK OF ENGLAND.

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 33, and
Chapter VI, page 39.)

Tables —

National Debt Statement, 31st March, 1920
Quotations : Consols and Bank of England Stock

1697-1919. British Funds : 1910-1919
Money Rates .
Treasury Bills — Discount Rates
England's Sovereigns
Authorities

Index and Glossary

147
150

157
161
166
169

174
179

181

188
193
193
194
195

199

Statistical statements in the text and tables as a rule are
given in round figures.

ENGLISH PUBLIC FINANCE

CHAPTER I

" 1920 "

The great world war of 1914-1919, terminated by the
acceptance by H.M. King George V, on 31st July, 1919,
of the Peace of Versailles, signed 28th June, 1919, cost
Great Britain over ^^lO.OOO 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 necessaxy by the war in excess of what would have
been the expenditiire for the period on the basis of the
pre-war budget.

An analysis of the total expenditure of the United Kingdom
from 1688 to 1920 discloses the amazing fact that for the
six fiscal years, beginning 31st March, 1914, and ending
31st March, 1920, the expenditure of the Government actually
exceeded the total expenditure for the^ two and a quarter
centuries preceding 1914. The exact figures are : for the
226 years, £10.944 million ; for the six years, £11,268 million.

* In 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 to-day. This fact should be
borne in mind all through these pages wherever similar money
comparisons are made.

1— (1823)

2 ENGLISH PUBLIC FINANCE

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,
31st December, 1919, amounted at par value of securities
issued to £7,368 million, £6,011 million fmnished 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
ending 31st March, 1919, from 22^ per cent, to 34| per cent,
of the expenditure was raised from taxation, other revenue
collections, and war contributions. In the fiscal year ended
31st March, 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 yielded 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-
1921) the budget will balance not only 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 national wealth of Great Britain, or, as some econo-
mists 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 to-day
we may quite conservatively take £24,000 million as the

" 1920 " 3

figure with which to compare the £8,078 million to which
the debt grew from the pre-war figure of £711 miUion ; giving
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 10 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.

^ This was the estimate made by Sir Leo G. Chiozza-Money before
the Income Tax Commission in September, 1919, which he thought
too low " if the nation were in lor a trade boom " (answer to question
11,137). The League of Nations has since estimated the British
national income at ;^112 10s. a head on the population of 46J million,
or, say, ;(5,200 million. By some authorities this estimate is thought
to be a better one than that of Sir Leo.

CHAPTER II

" 1914"

It was the turn of the business year. The cloud of pessimism
which had overhung the international finance markets since
the outbreak of the Balkan wars in 1912 seemed about to
disappear.

The half-yearly settlements had passed over smoothly in
the chief money centres 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 million,
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 10s. 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 1912 and
1913, when the discount rates had been high — averaging £3
lis. 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 territory.
Commodity prices in these years had been high and investment
seciu^ity prices low.

With 1914 had come a change in this situation and events
appeared to be favouring a revival in the securities markets

"1914" 5

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 miUion abroad. Her total
investments abroad were estimated to be not less than ;f4,000
milHon, 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 milUon.

As we have already seen, her national debt was only £711
milhon, 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 pro-
gramme 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 Parhament or for some equivalent
arrangement. The only serious pohtical 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.

War Breaks — Emergency Measures

On the 23rd July came the news of Austria's peremptory
ultimatum to Serbia, on the 25th Serbia's reply, and on
the 28th the starthng advices that Austria-Hungary had
declared war on Serbia. Money began to tighten ; the stock
markets became weak. On the 1st August, Germany and
Russia were at war. The foreign bourses were in a state of
panic. I^ndon and New York were the only important open
markets. They were flooded with international securities.

6 ENGLISH PUBLIC FINANCE

Between 20th July and 30th July 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 25J 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 1st August France ordered a
general mobilization following a peremptory note from
Germany on 31st July demanding that she define her attitude
within twelve hours. On this same day German troops
occupied 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 defence of Belgian neutrality in accordance
with her treaty obhgations.

Fortunately for the financial world these events were
taking place at the time of the London Bank Hohday, which
fell on Monday, the 3rd August. One of the first steps taken
was to extend the holiday to the 7th. This gave time in which
to take remedial measures. On 31st July the Bank rate had
been raised to 8 per cent. On the following day it was
raised to 10 per cent. 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 denominations 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 denaands 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

1914

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 borrowed.
The banks were thus provided with funds for over the counter
payments.

The Moratorium

The next step was, on 5th August, to declare a hmited
moratorium — ^that is, a limited period during which creditors
could not demand payment from those indebted to them.
This was at first for one month, afterwards extended to three
months.

Protecting the Acceptance Market

The most important action at this time was the provision
made on 12th August, that the Bank of England, under
Government guarantee 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 coffee
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
luxury ; 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

8 ENGLISH PUBLIC FINANCE

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
obhgation 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
mutually cancelling each other, while during the period they
had to run they were considered the choicest, the most hquid
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
nations, 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
miUions 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
situation 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 5th September, 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 biUs accepted by the same houses.

Treasury Bills Issued

On 19th August tenders were asked for £15 million Treasury
Bills to provide for the immediate needs of the Government

" 1914 " 9

in connection with these operEdions. These bills, dated
22nd August, represented the first pubhc issue of securities for
financing the war.

To obviate the risk of transporting gold across the ocean
it was allowed to accumulate for accovmt of the Bank of
England 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 31st October,
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
increase 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 27th July. Such loans also were to
run until a year after the war.

Advances to Export Merchants

On 4th November, a very interesting arrangement waS
made between the Government, the Banks, and the Association
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 under-
stood that the moneys provided were not to be taken by
the banks to reduce loans or overdrafts or to pay bank
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
accepting banks.

10 ENGLISH PUBLIC FINANCE

Similarly, the cotton trade was encouraged. On 14th
November the Government arranged a fund to be used to
enable borrowers to meet market differences. The payment of
the advances was guaranteed as to 50 per cent, by the Govern-
ment, 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
1914 to insure as nearly as possible an uninterrupted progress
of the banking and mercantile community. Although the
moratorium was not formally declared ended until 4th
November, 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 15th July to £11 million on 8th August,
became £69 million on 30th December. So that the proportion
of reserve to liabilities, after dropping from 52J per cent, in
July to \A\ per cent, in August, increased to 33| per cent,
on 30th December. At the close of the year money was a
drug on the market — ^three months bills being quoted at
2| per cent.

At the close of 1914 it was estimated that some £84 million
of special loans of various kinds were being carried for the
Government by the Bank. This total included pre-
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)

Having reviewed the financial measures adopted at the
beginning of the war to save the general business situation,
and especially to protect the banks, we now turn to a considera-
tion of the direct financing of the requirements of the
Government itself. The immense figures involved are a
matter of coramon knowledge. They are summarized as to
the classes of expenditures and as to sources of receipts in
the tabular statements printed on page 14. 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 practiced by all the Continental nations of
immense issues of bank notes. England did issue non-interest
bearing circulating notes — ^the Currency (Treasury) Notes
already mentioned — but the aggregate of ;£356 million out-
standing at the close of 1919 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.

Treasury Bills

Our friend the Treasury Bill — successor to the Exchequer
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

12 ENGLISH PUBLIC FINANCE

into ships, aeroplanes, tanks, ordnance, munitions, food
and clothing for the soldiers, separation allowances for their
famihes and finally into a crushing defeat of the enemy.

Taxation

But the entire dependence has not by any means been
placed upon this modern Aladdin's lamp. Taxes have steadily
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 31st March, 1920,
they yielded nearly ;f 1,000 milnon ! 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 apphed to its reduction. This ideal has
been fully reahzed and a good surplus in addition to apply
toward the payment of the mihtary and other special expenses
caused by the war. The provision of a sinking fund, while
the debt was a growing one, may be criticized 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
payment probably had a real value in estabhshing 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 year's disbursements, 22 per cent,
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 31st March, 1914, and
ending 31st March, 1920, aggregated ;^1 1,268 million. Of this
war-time expenditure ;^3,605 million was met from normal

WAR COSTS AND HOW THEY WERE MET 13

revenue receipts ; £466 million from war contributions,
receipts from sales of war property and receipts from trading
undertakings ; while ;f7,196 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 running
mate, the excess profits duty. Englishmen and their news-
paper editors dehght 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
studjnng the figures without any other object than to get at
the facts, the results achieved seem little short of marvellous.
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 comparative tables on page 14
showing income and expenditure for the six fiscal years 1914
to 1920, inclusive, summarize these data.

Six V. 226 Years' Expenditure

To grasp the full significance of these figures we may
advantageously compare them with the cost of government for
a previous period. In endeavouring to make such a com-
parison we have brought out the startUng fact to which
reference has already been made that the expenditure of the six
years of the war exceeded the aggregate expenditure of the
preceding two and a quarter centuries. The table following
visuaHzes 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.
Besides these major wars there were many costly military
expeditions, the growing cost of civil government, and the

ENGLISH PUBLIC FINANCE

GOVERNMENT INCOME— WORLD WAR PERIOD

31sT March, 1914, to 31st March, 1920

In Millions Sterling

Years Ended
31st March. 1915.

1916.

1917.

1918.

1919.

1920.

Total.

Aver-
age.

Per
Cent.
Total
Rev-
enue.

Exchequer balance . 10

Tax Revenue —
Customs
Excise

Estate duties
Stamps

Land, house, etc.
Property and income,
including super-tax .
Excess profits

60
61
31

7
3

128

205
140

240
220

103

291
285

149
133
41
23
4

359
290

493

392

193

1,292
935

82
65
32
11
3

215
156

12-06
9-59
4-72
1-63
•45

31-72
23-01

Total Tax
Post Office
Sundryi

189
29
8

290
34
13

514 1 613
34 35
25 59

784
40
65

999

296

3,389
216
466

565 8318
36 5-31
77 11-51

Total Revenue
Borrowing net

226 1 337! 673
410 ! 1,167 , 1,629

7C7
1.985

889
1682

1,339
323

4,071
7,196

678 ! 10000
1.199!

Total net Receipts

Total Resources .

Revenue —

% Receipts
Borrowing —

% Receipts

636

646

35-53
64-47

1,604
1,587

22-40
77-59

2,202

2,228

26-02
73-98

2,692

2,718

26-26
73-74

2,671

2,592

34-58
65-42

1,662

1,675

80-56
19-44

11,267

11,277

36-13
63-87

1,878

•* £140,000.

* Including war contributions from India, and other overseas colonies and dependencies
also receipts from sales of war property and from trading vmdertakings, etc.

GOVERNMENT EXPENDITURE— PERIOD OF THE
WORLD WAR

31st March, 1914, to 31st March, 1920

In Millions Sterling

Years Ended
31st March.

1915.

1916.

1917. 1918.

1919.

1920.1

Grand
Total.

Aver-
age.

Per
Cent.

of
Total.

Debt — Interest and Man-
agement

Mihtary and other special
war expense

Civil Government .

Post Office .

437
78
26

1,399
75
27

127 190

1,974 2 403
75 ' 78
26 26

270

2,198
85
26

332

1,146
140
48

1,001

9,557
531
179

166

1,593
88
30

8-89

84-81
4-70
1-60

Total Expenditure
Exchequer balance

663

1,661

2,202 2,697 2,679

26 j 21 1 13

1,666

11,268

1,878

100-00

To be accounted for

646

1,587 2,228 2,718 2,592

1,675

11,277

' Division of expenses partly estimated.

WAR COSTS AND HOW THEY WERE MET

ever present burden of the public debt. Here are the
figures —

GOVERNMENT EXPENDITURE
In Millions Sterling

Civil
Govt.

Mili-
tary.

Debt
Charge.

Total.

2\ Centuries (1688-1914)
6 Years (1915-1920)

2,873
710

4,524
9,557

3,547
1,001

10.944
11,268

Total (1688-1920) .

3,583

14,081

4,548

22,212

' '

This is the burden which German lust for power and
territory placed on one only of the antagonists. Fortunately
England has the abihty 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 miUion of increased
debt which the war has left as its aftermath.

The Budget, 1 920-1 921

On 19th April, 1920, Mr, Austen Chamberlain, Chancellor
of the Exchequer, presented to Parliament the budget for the
cuirent year to end 31st March, 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 victorious.
Eighteen months have elapsed since the prehminaries
of peace were signed. Though peace follows on limping
footsteps the time must come when each of us should set his
house in order, and, not content merely with facing present
necessities, 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."

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 system

16 ENGLISH PUBLIC FINANCE

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 current
year to end 31st March, 1921.

These contemplate a total expenditure of £1,184 million
and receipts of £1,418 milUon. The budget provides for
expenses of £481 miUion 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 miUion.
Therefore, while the financing of the past year resulted
in a deficit of £326 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 milhon which can be applied
to the reduction of indebtedness.

In order to accompUsh 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
capital. He said : " The quahfication to which the increase is
subject is this : The House is aware that a Select Committee
of this House is now enquiring into the practicability of a
levy on war increases of wealth. If, when they have com
pleted their deliberations, ParUament 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 per cent. I should therefore propose to submit to Parlia-
ment 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

WAR COSTS AND HOW THEY WERE MET 17

Duty and to collect Excess Profits Duty for the year at the
existing rate of 40 per cent."

" The increased revenue to be derived from this source in
the current year on the assumption that the rate is 60 per cent,
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 milhon actually
received will be the further sums accruing but not collected
during the present year, amounting to £65 milhon next year and
to a yet further sum of £25 milhon receivable thereafter. In
other words, the addition to the tax will produce £100 million
in ah."

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 milhon. A new
corporation tax is also proposed. In concluding his speech,
Mr, Chamberlain said : " These changes (in taxation) wiU
produce in the full year £198,230,000, £9,500,000 to be drawn
from the Post Office and £189 milhon derived as foUows — •
from direct taxation £125 milhon, from indirect taxation £64
miUion, For the current year they wiU 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 miUion, 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 assets of which
a portion may still be required to meet extraordinary charges,
£300 milhon ; Excess Profits Duty payable after the close of
the current fiscal year, £400 miUion. In all, assets of £1,724
milhon."

2— (1823)

18 ENGLISH PUBLIC FINANCE

" 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 milhon. 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 milhon 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 milhon, of which one-half at
any rate should be free for the floating debt. With the
advent of a normal year when temporary and extraordinary
receipts and charges have both terminated and on the assump-
tion that the Excess Profits Tax has also been brought to
an end, there should be available for the sinking fund a
balance of not less than £180 million.

" After such a war as that in which we have been engaged
and after gigantic financial sacrifices, this is a position of
unexampled and unequalled strength. It is true that to
attain it we are obliged to impose fresh taxation and to call
for further sacrifices. That may not bring popularity to
the Government or to the Minister. I am proud to say that
we have not sought it. Our object has been to rise to the
level of our great responsibilities, so that when we surrender
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 pursued
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 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 offer the bills at a fixed rate of discount. This
discount 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 181.

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 fimds
were needed.

It would be tedious to burden our pages with a detailed
description of each series of bonds issued. The issues now
outstanding will be found described in the National Debt
Statement to be found on page 181. However, it will be quite
worth while and of interest to note how the more important
loans were taken by the pubHc. The first of these loans was
for ;^350 milhon in 3| per cents. It was offered in November,
1914, at 95 and was subscribed by nearly 100,000 applicants.
The next loan was offered as 4| per cents, at par in June

20 ENGLISH PUBLIC FINANCE

and July, 1915, and £570 million were taken by over 550,000
subscribers asking for an average of about £1,000 each, while
1,330,000 subscribers bid through the post offices for
£35,600,000 bonds, an average of £26 6s. each. Then there
was the Anglo-French 5 per cent, loan placed in the United
States in October, 1915, of which England's share was £51
million.

The Foreign Securities Mobilization

Then came, in December, 1915, the scheme for the mobiliza-
tion of the foreign investment holdings of the British people
and their use to stabihze 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 certificate
entithng them to the interest which the loaned securities
5nelded 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 1916 in the acquisi-
tion by the Treasury of American stocks and bonds of a par
value in sterhng of £465 million, £118 milhon by purchase
and £347 miUion 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 operations of the
British Treasury was to maintain New York exchange at
practically a uniform rate of $4.76xV from January, 1916,
until 21st March, 1919, when the control was removed.
Similar operations were carried out for the stabiUzation of the
Dutch and Scandinavian exchanges. For the entire period
the total securities purchased amounted to £241 milhon, of
which amount £46,600,000 were purchased by the Bank of
England during 1915, prior to the inauguration of the

THE WAR DEBT 21

mobilization scheme. The deposits on loan amounted to £41A
million. The latter item included a special deposit of £8
million by the Canadian Pacific. Thus the total amount of
securities dealt with was £655 million.

The War Loans in 1917

In January and February, 1917, the 4 per cent, and 5 per
cent. War Loan met with an enthusiastic reception, about
£1,000 million being sold for cash. This time apphcants
through the Bank, numbering 1,089,000, took over £819
milhon bonds ; about one milHon applicants through the
post office took nearly £31 miUion, while it is estimated that
over four miUion members of war savings clubs participated in
purchases by such clubs of around £20 milhon bonds. Holders
of about £131 million Treasury Bills exchanged them for these
bonds.

War Savings Associations

The War Savings Associations 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 famihar. In England there
were many group purchasers, neighbourhood 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 Treasury in
February, 1916, on the advice of a Committee presided over
by Lord Montagu of Beaulieu. Its immediate functions were :

(1) To educate the pubUc 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.

22 ENGLISH PUBLIC FINANCE

War Savings Certificates were immediately issued, and the
National Committee proceeded to set up " War Savings
Associations." Decentralization being found essential to the
scheme, Local Savings Committees were organized throughout
Great Britain, a democratic basis therefore being imparted
to the scheme from the outset.

By the date of the armistice in November, 1918, there
were some 1,800 local committees, 14,000 ofi&cial agents and
branches, and 40,000 associations numbering not less than
5 miUion members. More than 250 million of 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
million, while the withdrawals were approximately only 10
per cent, of the total issue. The amount outstanding on
1st January, 1920, was i2<ol million.

At a great gathering in London on 15th January, 1920, Mr.
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 Of&ce and the Trustee Savings Banks
were something under £300 million, while by the end of
October, 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 enhsted by the Government from 1916 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 promised

to make the movement as big a success in peace as in war

^ This item includes deposits, the value of securities held by stock-
holders in the Post Office and Trustee Savings Banks and the amount
of War Savings Certificates outstanding.

THE WAR DEBT 23

time ; and emphasized the fact that, out of nearly 400 million
War Savings Certificates sold since the inauguration of the
movement, 124 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 Facilities
reported that it was enormously impressed by the great
increase in the number of small investors, and that the policy
which had proved so successful during the war must be
continued at all costs. It was decided to extend the "hfe"
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 movement. 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
during 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
National Union of Teachers was requested to render support
to the National Savings Committee. This the teachers are
accordingly 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

24 ENGLISH PUBLIC FINANCE

have behind us a gospel. In fine, it was from the outset a
gigantic effort 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 week. The bonds were issued as fives
subject to taxation, or as fours " income tax compounded."
While the expected goal was not fully 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 1919

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 per
cent, interest. Some £776 million bonds were sold.

Summary

The funded and unfunded debt as on 31st December, 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 1st August, 1914, held by about 345,000
investors. At the close of the fiscal year, 31st March, 1920,
the debt stood at £7,825 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
(if the debt matures within one year and about 28 per cent,
in addition within five years ; making nearly 50 per cent.
maturing within five years.

THE WAR DEBT

NATIONAL DEBT.
Funded and Unfunded as on 31st December, 1919.

Milhon
i

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

Due Within One to Five Years —

Exchequer Bonds

146,4

Victory Bonds

20,1

National War Bonds

619,0

Annuities ....

8,2

War Savings Certificates .

267,3

Debt in United States

48,5

Debt Due to United States Governme

nt 867.4

Other debt due to war — due Foreigi

Nations and to Dominions

329,8

Due Within Five to Seventy Years

Exchequer Bonds

16,6

Victory Bonds

334.4

National War Bonds

889,8

War Loans ....

2,122,6

Debt in United States
Funding Loan

60.0

409,1

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

Miscellaneous —

Other Capital Liabilities

Total

Total.

Per

Cent, of

Total.

1.566,5 19-39

2,306,7 28-56

3,832,5

326.8

47-44

4-04

46.2

•57

8,078,7 100-00

The outstanding Treasury Notes, amounting on SlstDecember,
1919, to £356 million, must not be overlooked in considering
the debt. However, as to the extent of £32,500,000 they
are covered by gold and Bank of England notes and for

26 ENGLISH PUBLIC FINANCE

the rest by Government interest -bearing securities which are
included in the debt statement, they 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 akeady 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 and Midland Bank in
their monthly review for April, 1920. comment as follows
on this matter —

"If expenditure and revenue for the current year fulfil
budget estimates the surplus will be about £234 million. Out
of this surplus the Chancellor estimates that about £160
millions will be required for the Victory Loan Sinking Fund,
for cancellation 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 milUon is to be applied to
reduction of floating debt. In arriving at this figure the
Chancellor has apparently not taken into consideration repay-
ments of £36| million on account of Civil Contingencies due
before 30th September, 1920, or the proceeds of sales of
Savings Certificates during the financial year . We show in the
appended statement that if receipts on account of Civil
Contingencies and Savings Certificates are included, there may
be a balance of £115 million available for the repayment of
Treasury Bills and Ways and Means Advances, after making
provision for the repayment of £25 million of Exchequer
Bonds in December next.

" If the following estimates prove to be correct the amount
of debt outstanding on 31st March, 1921, will be about
£7,565 million."

THE WAR DEBT

ESTIMATED CHANGES IN DEBT, 1920-21

(000 omitted).

Budget Surplus, 1920-21,
on 1919-20 basis of
taxation . . ^^157,548

Add estimated revenue
in 1920-21 from new
taxes

Civil Contingencies
Fund — Repayments
due before 30th Sep-
tember, 1920 .

Sales of Savings Certifi-
cates, based upon net
proceeds 3 months to
31st March. 1920

76,650

36,490

29,840

;^300,528

Victory Loan Sinking

Fund
Cancellations through

Death Duty Payments :

;^3,840

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 1st Dec ,1920 .

25378

Available for repayment
of Treasury Bills
and/or Ways and
Means Advances

185,378

115,150

/300,528

^ Presumably the Anglo-French Loan. H. E. F.

Refunding Operations

The Chancellor of the Exchequer announced on 28th April
his intention to place on sale, as on 3rd May, a new series of
Treasury Bonds with the avowed object of reducing the
floating 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 Consohdated Fund. The
bonds will be repayable on 1st May, 1935, or on 1st 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.

28 ENGLISH PUBLIC FINANCE

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 1st May and 1st November
and, subject to the conditions stated below, will carry addi-
tional interest payable during the period ending 1st May,
1925, as follows : If and when during any half-year ended 1st
May or 1st 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 5 J per cent, and under 6^ per
cent, per annum, additional interest will be payable on the
interest date next succeeding such 1st May or 1st November at
the rate of 1 per cent, per annum. If and when such average
rate of discount was 6^ per cent, per annum or over additional
interest will be payable at the rate of 2 per cent, per annum.

" The first interest payment, payable 1st November, 1920,
will represent in the case of each bond interest to that date
from the date on which the application was lodged and
pa5niient 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
succeeding interest date."

In the opinion of the Chancellor, the novel feature in regard
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| per cent. War Loan was selhng to yield
£7 3s. 7d. per cent. ; A\ per cent. War Loan £6 7s. 6d. per cent.
and 5 per cent. War Loan, £6 5s. Id. per cent., therefore the
success of the new issue was considered problematical. How-
ever, the Government is so fully alive to the importance of

THE WAR DEBT

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 31st March, 1920, of about £7,973 milHon
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 financial
statement already referred to laid before the House upon
the opening of the budget —

LOANS TO DOMINIONS AND ALLIES.
31sT March, 1920.
(00,000 omitted.)
Obligations of Dominions —

Australia .....

. ;^51.6

New Zealand ....

29,6

Canada .....

19.4

South Africa ....

15,8

Other Dominions and Colonies

3,1

£119,5

BLIGATIONS OF ALLIES

Russia .....

. ;^568,0

France .....

514,8

Italy

. 455,5

Belgium (a) War

92,0

{b) Reconstruction

5,3

Serbia .....

20,9

Portugal, Roumania, Greece and other

AlHes 66,6

Relief Loans ....

8,0

;^1.731,1

;^1,850,6

Further advances of £36 miUion provided for in the estimates
1920-21 will raise this total by 31st March, 1921, to
approximately £1,886 million.

Mr. Chamberlain in his budget speech estimated the

30 ENGLISH PUBLIC FINANCE

advances to the allies as probably realizable at about 50 per
cent, of their face value. This would afford an offset of about
£1,000 million against the gross debt.

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, American
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 wiUingness to extend to their debtors
similar treatment to that which may be arranged in respect
of their own debt.

The Comparative Burden of the Debt

Assuming, then, about £1,000 million to be reahzable
from debtor nations and the Dominions, the net indebted-
ness of the nation on 31st March, 1920, may be placed at
£7,000 milhon as against national wealth estimated at perhaps
£24,000 million ; a ratio of about 30 per cent, net debt to
national wealth. The debt charge of, say, £360 milhon
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 per cent, of the income, compares with
8 per cent, in 1817.

In the table printed on the opposite page further interesting
comparisons are made with conditions at the conclusion of
the Boer War and on 1st August, 1914, just before the recent
war began.

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32 ENGLISH PUBLIC FINANCE

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
reduce steadily 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
during 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 liabilities 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 deposits
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
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 to pay its expenses for mimitions, for food

3— (1823)

34 ENGLISH PUBLIC FINANCE

and clothing for the enlisted men, and for the hundred and
one other needs of a nation in a time of war.

Bank Reserves v. Credits

The extent to which a bank can extend credits to its
customers 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
System, which comprise all 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 10 to 20 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.

HOW THE BANKS HELPED FINANCE THE WAR 35

In the case of the large loans, it was customary to divide
the payments into several instalments 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
consisted 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 accounts
with their banks, which re-estabHshes the banks' reserves
and prepares them for another instalment." 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
the payments into instalments, so that each instalment
might have time to get through the Bank of England, through
the business firms, and back into the banks before another
instalment was required.

One method by which the banks developed an ability to
finance the stupendous needs of the Government was through
a utihzation 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 chents loans equivalent to, say,
five times such deposits.

36 ENGLISH PUBLIC FINANCE

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 favour 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 Cunhffe's " Committee on Currency and Foreign
Exchanges after the War " to tell us.

In their final report, laid before Parhament in December,
1919, the Committee 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 Parhament to
borrow from the Bank of England in the form of an overdraft
on the credit of Ways and Means were, as the name implies,
intended to enable the Government to anticipate receipts
from revenue or permanent borrowings for a brief period only.
Indeed, Parhament, by expressly providing that all such
advances 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
exigencies 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
outstanding 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 the 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

HOW THE BANKS HELPED FINANCE THE WAR 37

are entirely unsuitable for borrowings over a longer
period,"

In their interim report, submitted in August, 1918, 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
example, that in a given week the Government require
;^10 milhon over and above the receipts from taxation and
loans from the pubHc. They apply for an advance from the
Bank of England, which by a book entry places the amount
required 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
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 " Pubhc " to " Other " deposits, the
effect of the whole transaction thus being to increase by
£10 million 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' HabiUties to depositors having thus increased by
;^10 million and their cash reserves by an equal amount, their
proportion of cash to habilities (which was normally before the
war something 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 between
the cash received and the proportion they require to hold
against the increase of their deposit habilities. 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 Govern-
ment and returned in the manner above described to the

38 ENGLISH PUBLIC FINANCE

bankers' cash balances, the process being repeated again and
again, until each ;^10 million 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 pubhshed 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 Cunhffe
Committee's reports, from a paper on the Statistical Aspects
of Inflation, by Professor J. Shield Nicholson, 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
because call loans are reported together with cash in hand and
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

THE WAR CREDIT STRUCTURE 41

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
corporate investors other than the banks, and that they are
not borrowing against such holdings. ^ The probabihty is
that a much larger amount is so held, as the increased assets
of the banks must represent, in addition to Government
obligations, large increased holdings of business paper.

Note and Deposit Currency v. the Gold Reserves

Tables II and III permit of a year to year study of the
growth of the note and deposit habilities 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. (See pages 42 and 44.)

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
connection with deposits where the estimated effective gold
reserve held against all deposits on 31st December, 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
December, 1919, an increase of 144-7 per cent., the specie
reserves held increased only from £85 milhon to £160 milHon,
a decrease from 6-9 per cent, of the HabiUties to 5-3 per cent.

It is evident that in the diminishing gold reserve and the

increasing liabilities we have a serious situation.

^ This is particularly true in view of the fact that, included in this
;^6,000 million of debt, would, of course, be the indebtedness to the
Government of the United States and to other foreign governments,
as well as that to the British Government itself, under guise of the
Currency Note Redemption Account, the Savings Banks Account and
other public funds which hold Government securities.

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THE WAR CREDIT STRUCTURE 43

High Prices and Bank Credits

Present high prices are easily explainable when it is
considered that the actual volume of commodities re-
quired 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 Professor
Kemmerer beUeves it to be unlikely that the actual increase
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 under-
stand 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
declines when new crops come in and advances as the bins
become empty, but, as a rule, there will be no marked deviation
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
war, then the price level will reflect these conditions. Let
us see what happened between 1913 and 1920. Taking the
price index of 31st December, 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 over
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.

THE WAR CREDIT STRUCTURE

Here are the figures-

ECONOMIST " PRICE INDEX.

Increase

per cent.

)ec. 31.

Index No.

over 1913.

over 1913

1913 .

2623

Base

100-0

1914 .

2800

177

106-7

1915 .

3634

1011

138-5

1916 .

4908

2285

187-1

1917 .

5845

3222

222-8

1918 .

6094

3471

232-3

1919 .

7364

4741

280-7

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 important
commodities and take their testimony. This we have done
in the following table —

ONE EVIDENCE OF INFLATION.

Quantities and Values of Imports Compared.

( In Millions.)

1913.

191

1919.

Calendar Year.

Quanti-
ties.

Value.

Quanti-
ties.

Value.

Quanti-
ties.

Value.

Wheat, cwt.

105

;^44

£53

;^68

Beef, cwt.

Sugar, lb.

Tea, lb.

365

463

510

Cotton, cwt.

150

190

V^ool, lb.

800

413

1,042

Thus we see that the quantities of wheat, beef, sugar,
cotton and wool imported in 1918 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

46 ENGLISH PUBLIC FINANCE

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 specula-
tion in check and gently but firnily 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.

CHAPTER VII

CROWN FINANCE

(1066-1688)
The foundations of England's present-day financial structure
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 Exchequer 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
accounts 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 inseparably
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 1215, was only won after four and a
half centmies 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 politic who from time to time were capable of taking
part in public affairs. In the time of the Norman Kings
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.

48 ENGLISH PUBLIC FINANCE

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 oiuselves now
enjoy. " No taxation without representation " was not a
new formula in 1776. The principle had its beginnings
centuries before.

We are to study English public finance since the Revolution
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 inunemorial 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
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 oui attention to the eleventh century and
trace the coiuse 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 ?

The King's Demesne

First of all he found that Alfred and his successors down
to the time of Edward (called "the Confessor ") 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 landowner 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 defence was to
be built or repaired, burg-bote ; 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
materials a money equivalent was given.

Dane-geld

These taxes, intended to meet the ordinary contingencies
of day-to-day life, did not sufiice to repel the attacks of the

4— (1823)

50 ENGLISH PUBLIC FINANCE

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
demanded 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 defence 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 endiired 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-
bourhoods.

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

REVENUES OF THE ANGLO-SAXON KINGS 51

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
public finance is inseparable from a study of the development
of England's liberties.

Licences

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 devotions
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
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 travelling were bad, and oppor-
tunities to supply their needs were scant. At these fairs they
could barter their sheepskins and agricultiual 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 account

52 ENGLISH PUBLIC FINANCE

as a means of revenue, charging fines, or, as we would say,
licence fees, for the right to hold the fairs.

The Exchequer

There was in use, too, in all probability, a system for
collecting 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
Victoria, 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, previously described,
enjoyed 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 last-named 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 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.

54 ENGLISH PUBLIC FINANCE

Purveyance

Under the name of purveyance, the King 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 con-
stituted 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 fountain head of justice, the King was entitled to a
share of the fines levied upon criminals of high or low degree.
All treasure trove, i.e. money, plate, or bullion found hidden
in the earth ; waifs, or goods stolen and waived ; stray
cattle, wrecks, or large fish belonged to the King. These
were known as bona vacantia. The custody of the property
of idiots and any profit accruing after providing for their
support ; also estates to which no claim could be made by
rightful heirs fell under this head.

If all of these sources of income were not sufficient, the
King might debase the coinage ; he might ask his people for
presents — sometimes called contributions, and subsequently,
by the Tudors, benevolences ; or he might simply extort or
exact gifts or call for loans which he might or might not pay
as the spirit moved him. It may be noted here that based on
the so-called voluntaiy offerings to the King an additional
10 per cent, was levied for the personal use of his Queen — ■
this contribution was known as Queen's gold.

Having seen what were the sources of the King's income at
the time of the Conquest and during the reign of the Norman
Kings, we may now consider the subsequent developments.

CHAPTER X

CROWN REVENUES SUBSEQUENT TO THE NORMAN
PERIOD

(1154-1688)

The constant effort of the people from very early times,
perhaps not at first a very definite intention, was to keep
the King poor, so that he would need to come to them for
suppHes. Then, by withholding money grants until their
grievances were remedied, little by little they developed the
constitutional rights now enjoyed.

The principal sources of revenue of the early EngUsh kings
and queens, other than the revenues derived from their
demesnes and prerogative as already described, were the
customs duties, internal taxation, borrowing and extortion
in various forms.

The first two may be described as legitimate, or constitu-
tional, sources ; the last as a method of evading constitutional
processes. Borrowing was strictly the personal act and
privilege of the sovereign. It was used as a legitimate means
of bridging over gaps in the receipt of revenue. Frequently,
also, it was used as a means of avoiding the necessity of asking
Parhament for a grant. It was often only a disguised form
of extortion.

It may be of interest briefly to consider each of the sources
of income.

The Customs

The King's right to exact tolls on goods going out of or
entering the kingdom is supposed to have grown out of the
idea of purveyance. Certain it is that the right to prisage —
that is, to take goods or chattels in kind — and to the collection
of tolls or duties on wool and other exported goods was
exercised from an early date and was prized by all the kings

56 ENGLISH PUBLIC FINANCE

reigning down to the Revolution as one of the choicest of
their hereditary privileges. It came to be understood that
without parliamentary grant the King could collect what
are called in Magna Charta " the ancient and equitable
duties." These consisted of an export duty which was
collected on wool, wool-fells (that is, skins with the wool
attached) and upon leather. The King, as one of his preroga-
tives, was entitled to two casks of wine out of every cargo.
This right was afterwards reduced to a definite tariff on wine
and was known as the " New Customs." In the time of
Edward I, toward the end of the thirteenth century, the
custom arose of granting the King, for life, duties known as
" tunnage " and " poundage." These duties were levied
upon every tun of wine and upon every pound of merchandise
imported ; also at times upon exports. They were levied in
addition to the old and new customs duties.

In addition to the hereditary duties and the life grant of
tunnage and poundage the King received customs subsidies,
as they were called. The subsidy was a parliamentary grant
in excess of those already described. These grants were
made from time to time as called for by the exigencies of the
King's affairs. In times of war they were greater than in
times of peace. They were always granted for short periods.

The customs revenues were especially prized by the earlier
kings of England even down to the time of the Revolution,
because there were so many ways in which they could be
utilized to maintain a position independent of parliamentary
control. Some of the kings formed the practice of dealing
directly with the merchants in connection with customs
matters and thus obtained an informal revenue in addition
to that levied by law.

From early times the right to levy customs duties was
used both by King and Parliament to promote home manu-
factures. This use of the tariff to regulate commerce and to
develop home industries was continued until well into the
reign of Queen Victoria, when the free trade regime
began.

CROWN REVENUES SUBSEQUENT TO NORMAN PERIOD 57

Internal Taxation

The medieval forms of taxation forecast most of the
methods now in use. There were poll taxes, a species of
house tax called " hearth-money," land taxes, taxes on
personal property and taxes upon income. There were also
special taxes upon the Jews and upon aliens residing in the
country.

The land tax may be traced back to feudal times. In the
very early days it was directly assessed by the King upon
the landed proprietors. However, because of the abuse of
this right, it was provided in Magna Charta that no scutage
or aid (the name under which the form of land tax then levied
was known) should be imposed unless with the consent of the
Common Council of the realm, excepting for ransoming the
King's person, making his eldest son a knight, or marrying
his eldest daughter ; and even then only a reasonable aid was
to be demanded. In the course of time the land tax came
to be included under the general name of subsidies.

A subsidy was properly neither a tax upon personal nor
landed property, but upon income. Every description of
persons, in proportion to their reputed estates, paid after
the nominal rate of four shillings in the pound for lands and
2s. 6d. for goods, while aliens paid in a double proportion.

One of the earliest forms of taxation dating from the reign
of Edward III, say, from 1334, and in use until the time of
James I (1603-1625), was a tax on personal property known
as " tenths and fifteenths." The tenth was a grant laid upon
the movables or personal property of residents of cities and
towns within the demesne, and the fifteenth was a grant
from the counties outside the demesne. The amount for each
district was established in 1334 and thereafter was never
changed. Thus each district knew exactly how much it was
expected to provide. Parliament in making grants would
specify that one or more tenths were to be granted, or if only
a small sum were needed half of a quota might be granted.

During the regime of the Long Parliament (1640-1653) a

58 ENGLISH PUBLIC FINANCE

form of taxation was introduced calling for monthly pay-
ments. These taxes were assessed on both personal and
landed property. They were found to be so superior to the
former mode of subsidies that under the name of land tax
they became a regular method of taxation in use for many
years thereafter and superseded the old assessments of
subsidies and tenths and fifteenths.

Indirect taxation, except as exemplified in the customs,
was unknown in England until the middle of the seventeenth
century when, in 1643, the Long Parliament adopted from
Holland a system of excise taxes. This method of disguised
taxation from that time became increasingly popular Avith the
Exchequer Department because thus it was possible to keep
down the taxation upon the rich landed classes and to obtain
what amounted to a very heavy tax from the consumers of
various articles — chiefly beer and spirits, but, later on, of tea,
cocoa and other articles — without their realizing that they
were paying taxes. As time went on, this form of taxation
was used on occasion to regulate the sale of spirits when the
Government felt that their use was endangering the moral
status of the nation. Again, the finance ministers directly
encouraged the consumption of spirits in order that the
revenue from the excise might be increased. To-day this
form of taxation provides a very important portion of the
revenue of the State.

The Post Office dates from the time of the Long Parliament,
but as the charge for its services usually provides very little
revenue to the State, the receipts of this department can
hardly be considered a form of taxation.

Taxes of To-day and Their Origin

It is of interest to run over the heads of taxation as given
in to-day's official Finance Accounts, and to note how the
most important of these taxes had their origin prior to the
time of the Revolution. For instance, we have, in order, the
Customs dating back to the earliest times ; the Excise dating
back to the Long Parliament ; Stamps — first introduced in

CROWN REVENUES SUBSEQUENT TO NORMAN PERIOD 59

1671 — imposed by a statute entitled " An Act for laying
impositions on proceedings at law." The Land Tax persists
but now affords a very slight part of the revenue, although for
hundreds of years it was of great importance. The House
Duty may be said to be the modern form of hearth tax, which
under the name of " fumage " dates back to Anglo-Saxon
times. Property and Income tax — ^the first levy of a tax
of this kind — dates back to the reign of Richard I in the latter
part of the twelfth century. It will be remembered that
upon his return from his memorable crusade to the Holy
I^nd, Richard was captured by the Emperor of Germany and,
in order to effect his release, was compelled to pay a very
heavy ransom. It was to help raise the money for the pay-
ment of this ransom that the first tax in the nature of an
income tax was laid. This tax was both an income tax and
a personal property tax and called for one-quarter of the
revenue or goods of every person in the realm. The Excess
Profits Duty is a modern form of the income tax. Land
Value Duties are another form of the land tax. The Post
Office, we have already seen, dates from the time of the Pro-
tectorate. Crown Lands, a prehistoric source of income,
still figure in the statement and actually yield to-day more
than the land tax. Thus with the possible exception of Estate
Duties only, the p-esent main forms of taxation all had their
origin in medieval times, or at least date from a time prior
to the period of the Revolution of 1688. Even in the last
case we have an ancient parallel in the fact, as stated on
page 54, that estates to which no claim could be made by
rightful heirs reverted to the King.

The Church

A large portion of the revenues of the medieval kings was
drawn from the Church, which is stated to have held in the
fifteenth century a fourth of the landed property of the King-
dom. Taxation was supplemented by extortion and finally
in the reign of Henry VIII by the wholesale confiscation of
Church properties.

60 ENGLISH PUBLIC FINANCE

Extortions

We have now reviewed the regular sources of Crown
income. The pre-Revolution sovereigns were perpetually
living beyond their income and frequently were at swords'
points with Parliament. Therefore they exercised their
ingenuity to discover means of meeting their expenses without
going to Parliament. To this end they pushed their preroga-
tive rights to great extremes. By collusion with the judges
they punished infractions of the laws with severe fines. As
stated above, they made levies on the religious orders and upon
the Church, and Henry VIII confiscated Church properties.
They made forced loans from their subjects of high and low
degree which they forgot to pay. They created new orders of
nobility for initiation into which they made heavy charges.
They went around among their subjects almost hat in hand
asking for gifts — " benevolences," they were called. They
granted licences for various acts. They engaged in business
enterprises and had part interests in privateering expeditions.
Then there was the loot and the spoil of the wars in which
most of them engaged. One favourite method of supplying
national requirements and of filling his private purse was for
the King to grant the right to monopolize certain lines of
manufacture or of business and finally, if all else failed, the
coinage might be debased and the seigniorage realized.

Coinage

The first debasement of the coinage recorded is in the
reign of Edward I when, in the year 1300, the penny was
reduced one-half grain in weight, so that 243 pennies, instead
of 240 as before, were struck from a pound of silver. In 1344
and again in 1346 the standard was further lowered, raising
the number of pennies in the pound to 270. In the reign of
Edward IV, in 1464 and 1465, the number of pennies to the
pound was raised to 450. Henry VIII and Edward VI
debased the coins several times, so that in the latter's reign
the silver coins contained only one-seventh of the pure metal
that went to the same coins of 25 years before.

CROWN REVENUES SUBSEQUENT TO NORALA.N PERIOD 61

One of the notable events of Elizabeth's reign was the
restoration of the coinage. This she arranged before she
had been two years on the throne. It is said to have been
necessary for her to borrow two hundred thousand pounds
from the city of Antwerp in order to carry through this
reform. Even Elizabeth, with all her inherent love for
financial honesty, was prevailed upon to have a base coinage
struck for use in Ireland, while in the forty-third year of her
reign she was persuaded to have sixty-two instead of sixty
shillings minted from the pound of silver. Since the reign
of Elizabeth no sovereign has ever attempted to debase the
coin of the realm. However, through sweating and clipping,
the coinage had become so debased at the time of the Revolu-
tion that in 1696 William HI was compelled to take steps
for its restoration.

CHAPTER XI

CROWN DEBTS

(1216-1688)
Henry HI (1216-1272) is the first king of England whose
debts are recorded in history. In the 16th year of his reign
they had become so great that Parliament was obliged to
grant an " aid " — that is, a tax — to assist him in paying them
off. He is said to have pawned the jewels of the crown,
his robes of state and other royal ornaments, and even the
shrine of St. Edward. Matthew Paris, the chronicler of this
period, states that he owed so much to so many different
people, for the very necessities of life, that " he durst hardly
appear in public for the clamour of his creditors." Henry
borrowed from the Italian merchants, from the Jews, from
his own brother — in fact, when and where he could.

Interest Payments Forbidden

The sentiment of the time was strongly against the pay-
ment of interest, or " usury," as it was called ; in fact, such
payments were interdict by the Church. However, in case
of the non-payment of a loan when due, a charge could be
made for the inconvenience to which the lender had been
subjected by such delay. Such charges sometimes ran as
high as 10 per cent, a month.

Thereafter scarcely a reign passed without borrowing to a
larger or smaller extent. If these debts were not liquidated
within the reign they were usually honoured by the succeeding
monarch. Fortunately for the lenders there was a supersti-
tion that until the debts of the deceased were paid his soul
would remain in purgatory. Therefore it was a filial duty
for a son to provide for his father's obligations.

Security Given

These loans were sometimes raised upon the security of
the customs. Sometimes the customs were " fa^^med " or

CROWN DEBTS 63

sold to foreign money lenders for a lump sum or for an agreed
periodical payment. The farmer, as his profit, retained any
amount collected above the agreed payment.

Towards the end of the reign of the fifth Henry, we find a
new precedent being established in regard to Crown debts.
This occurred in 1421, upon the return of the King from a
successful campaign against the French. The King had
incurred heavy debts for the payment of which Parliament
authorized security to be given in the form of letters patent
to the lenders that they would be paid out of the first produce
of a subsidy, a new tax of the nature of an income tax, which
was granted at the same time and which we have already
described. The fact that this tax did not prove to be suffi.-
cient for the purpose and that in the end the King was com-
pelled to pledge the royal crown and jewels to make up the
deficiency does not alter the significance of this action.

Repudiation of Debts by Henry VIII

Henry VIII, among other infractions of the laws of God
and the rights of his subjects with which he was justly charge-
able, was also guilty of repudiating his debts. The Parliament
of 1525 which impeached Wolsey passed an extraordinary
statute wherein " they do, for themselves and all the whole
body of the realm which they represent, freely, liberally
and absolutely, give and grant unto the King's highness,
by authority of this present Parliament, all and every sum
and sums of money which to them and every of them, is,
ought or might be due, by reason of any money or of any
other thing, to his grace at any time heretofore advanced
or paid by way of trust or loan, either upon any letter or
letters under the King's privy seal, general or particular,
letter, missive, promise, bond, or obligation of repayment
or by any taxation or other assessing, by virtue of any com-
mission or commissions, or by any other mean or means,
whatever it be, heretofore passed for that purpose." This
action naturally excited much resentment and worked hard-
ship to many, as it converted loans into taxes because the

EXGUSH FCVUC FTXAXVIZ

Ac TTftaxnat of ^lAicii mas refosed. \
OLiuiteil fcoB Ae kados^ exactlj^ a
taken m tbe farm of taxes. On tbe otbcr
ihut vcre nsuny vibo mere pleased to see Wofenr's
far tkey mere tke |a aw i|Ml cxcdUcKS^ amexcedp aad tke
Kii^s debts iiiiiiiiifcflni i1 Ibe finem^ of tke pcofie mere
^ad that a Mode of sa|iistv so daageroos to pohic Hbcrty
be dbuedUcd. Uns bad pnecedeal mas fiiliiwiri
a 1544. lAea a sinibr act mas passed rdeasiae tke
Sjb^ fraaa al moory bcsramed aoce 15^ and. laewei.
reqnaig tkose adu had leieiied any payments oa atecmat
of sack kaas to rcfand tke WMmef to lAe Treasmy .

\"in

VI and of Hoy k
aas on tke Cootinfm.

- -T^. A? bSc?! as 14 OCT ceat.

Hamboif:, Ookene and
'- ^om 10 percent, to

:v of

CRO\^'N DEBTS 65

Finally, by frugality and good management, she procured the
money at home to liquidate entirely her foreign debt.

Stop of the Exchequer

The Stuarts were also hea\y borrowers, while to the discredit
of Charles II is the fact that in 1672 he stopped the repa^-ment
of loans made by the Goldsmiths to the Exchequer. He
thus tied up their resources and ruined many of them and,
in turn, their clients whose bankers they were. This debt
was finally compromised late in the reign of William III
at ten shillings on the pound. This is the famous " Stop of
the Exchequer."

All in all, the hist on,- of Crown borrowing is not a very
creditable one. It should be borne in mind that in these
early days there \^-as no such thing as a national debt. The
lenders dealt with the King very much as they would with a
private indi\iduaL As, for a large part of this period, the
pa^Tnent of interest was regarded as an irreligious act, many
subterfuges were resoned to in order that the lender might
be compensated for his risk and the use of his capital. One
arrangement was that a charge might be made for delayed
pa\Tnent5 ; therefore it was customary to allow a loan to
mature and then to run along for a longer or shorter period
thereafter. The money lenders sometimes received a per-
centage on the taxes collected b}- acting as farmers of the
revenue as already explained. Sometimes the lenders were
rewarded with gifts of titles, or lands or jewels.

5— (182S)

CHAPTER XII

CONSTITUTIONAL GOVERNMENT DEVELOPED BY CONTROL
OF PURSE

(1066-1688)

England's present democratic form of government has
been developed from the autocracy of the Middle Ages by
a gradual process of evolution.

The Plantagenets

Magna Charta extorted by the barons from King John in
1215 remedied certain feudal abuses in the matters of pur-
veyance, relief, wardship and marriage and in particular
admitted the right of the nation to ordain taxation and defined
the way in which its consent was to be given.

Before 1295 when arranging for grants it was customary
for the King to deal separately with the clergy and the barons.
In this year, in the reign of Edward I, a transition which had
been gradually taking place since 1282 took fixed form and
the Commons were admitted to a share of the taxing power.
The three estates acted separately and made grants of varying
amounts, but they took action simultaneously at a common
place of meeting. The year 1303 is memorable in commercial
as well as constitutional history. It was in this year that
the Charta Mercatoria was granted. This has been called
the Magna Charta of Commerce. By its terms the ports,
cities and towns of England were opened for wholesale traffic
to foreign merchants.

The codification of the laws under this King and the
revision of the charters all tended to strengthen the position
of the people.

The necessities of Edward III and the weakness of Richard
II still more strengthened the position of the people, so
that they did not hesitate to depose Richard in favour of a
king who it was thought would reign more equitably, but

CONSTITUTIONAL GOVERNMENT 67

while conditions then were not dissimilar to those subse-
quently, at the time when James II was deposed, the people
were not yet ready to take advantage of the progress they
had made. The King was still an autocrat and would be
for several centuries, but the right of the taxpayer to be heard
before he backed up the King's projects with his aid was
coming to be fully recognized, although the King constantly
endeavoured to evade that condition, only to be brought to
book again when some critical situation, such as a foreign war,
requiring large contributions, should arise. But it took
several centuries more of experience before the people were
prepared for self-government.

Lancaster and York

The six reigns of the Lancastrian and Yorkist kings covering
the greater part of the fifteenth century (1399 to 1485) were
years of foreign wars and domestic strife. During the reigns
of the Lancastrian Henrys, constitutional forms were well
observed. This period of about sixty years was one of
poverty on the part of the Crown when large dependence
must be placed upon parliamentary grants. On this account
Parliament became much bolder than in previous reigns.
It did not hesitate to interfere with the management of the
King's household, by urging economy in household expendi-
tures and limiting the purposes for which such expenditures
might be made.

It was during the reign of Henry IV that the right of the
Commons to initiate money legislation was brought to the
fore and the precedent in that respect more firmly established.

The Tudors

The Tudor period (1485-1603) was one of reaction. The
people to a great extent lost control of the Crown. For
the most part parliamentary forms were observed and the
checks to royal authority which had been gradually developed
from the time of Norman William were not directly
contravened but more than once they were evaded.

68 ENGLISH PUBLIC FINANCE

The customary grants of revenue by votes of Parliament
were made at irregular periods and it is known that the
revenue from such sources was relatively unimportant in
comparison with that derived from the customs, from the
King's prerogative and from compulsive and voluntary loans,
and during the reigns of Henry VIII and Edward VI from the
debasement of the coinage and the sales of the confiscated
church lands. In other words, the sovereigns of this period
found ways and means to get along with small parliamentary
grants and therefore could be as autocratic as their fellow
monarchs across seas while yet keeping up the appearance of
subserviency to old constitutional forms.

The Stuarts

The period of English history lying between the reign of
Elizabeth and the Revolution (1603-1688) is distinctive as
the one in which the powers of sovereignty are finally trans-
ferred from the Crown to Parliament. After the close of the
seventeenth century we no longer speak of Crown finance
but of national finance. While all other peoples, with the
exception only of the Swiss, were giving up all rights of
citizenship to autocrats of the most absolute type, England
was evolving a system of government which combined
" freedom with efficiency, and local rights with national
union."

These changes did not take place hastily — in fact, English
life in all departments of activity was essentially the same,
so far as surface indications went, in the times of the first
Scotch kings, as it was during Elizabethan times. Political
events of great importance were gradually shaping men's
minds for the radical changes of the latter part of the period —
from 1640 on.

The Stuarts had all the Tudor love of power and belief
in the inherent rights of monarchs to rule, without the Tudor
ability to manage their subjects.

James I did not know anything, either in the spirit or in
the letter, about the laws and liberties peculiar to England.

CONSTITUTIONAL GOVERNMENT 69

Constitutional custom and parliamentary privilege meant
nothing to him until late in life and then he looked upon them
solely as an impediment to a benevolent government. Eliza-
beth by her economies had put the finances of the nation on
a sound basis and had left the Treasury in a flourishing
condition. However, James spent money so freely that he
was in constant need and thus was continually in opposition to
Parliament. Early in his reign he revived the feudal rights
of the King to collect revenue independent of parliamentary
grants. A vigorous controversy arose over these efforts of
the King. A compromise was proposed in the form of a
contract to be entered into by the Crown with ParHament,
whereby in consideration of a grant for life of ^^200,000 a
year the King would surrender all sources of revenue due to
his prerogative. The consummation of this plan was pre-
vented by religious controversies which led to the dissolution
of Parliament in February, 1611.

From this time until January, 1621, a period of ten years,
the King reigned without parliamentary co-operation except
for a two months meeting of the " Addled Parliament " in
1614. Court intrigue dominated public affairs for this decade.

Finally, the approach of war abroad made it necessary in
1621 to call a Parliament, and for a few years the parliamentary
side was temporarily in the ascendency,

Charles I succeeded to the throne in 1625 and for eleven
years conducted the affairs of the nation without the aid or
interference of Parliament. Then the pent-up forces of
democracy broke loose, assuring to England and the English-
speaking world the ascendency of the principles of
representative government.

Commonwealth and Protectorate

The period from the death of Charles I to the accession
of Charles II (1649-1660) is called by some historians the
period of the Republic. Nothing could be further from the
modern conception of a republican form of government —
that is of a government founded upon representation. The

70 ENGLISH PUBLIC FINANCE

government of Cromwell was dependent for its power
upon his army and he dare not appeal to the voters except
in a partial and negative way. As Trevelyan says : " When
the roundheads in the name of the people had seized power
they found not only the active champions of democracy
but the people itself — whatever definition be given to that
term — bitterly hostile to their rule."

Nevertheless the period was one of active training of the
people for self-rule. The naval supremacy of Great Britain
was then firmly established and the path of Empire blazed
and its foundation laid.

Public discussion which under James had been frowned
upon and under Charles actively repressed was free and
open after the war broke out between King and Parliament.
The period was one which compelled men to think hard
and to take definite positions, for which they must be prepared
to give their reasons and to stake their lives and fortunes.

Under the Commonwealth and the Protectorate the cost
of government was the highest which the country had ever
known. However, this increased cost was part of the disci-
pline which the country needed to prepare it eventually for
self-government. Still this does not change the fact that
the Protectorate was thereby brought to its end and the
restoration of the monarchy made popular.

The pressure of taxes, the general depression of trade,
the poverty and suffering of the working classes and the bad
state of credit all combined to make the people ready for a
change. So, when the guiding hand of the great Cromwell
was removed by death, his government easily disintegrated
and once more a king took his place at the head of affairs.

Charles II

The restoration of the monarchy seemed to be necessary
to prevent civil war. It was the only form of government
upon which all parties could agree. The country was to
endure for almost a generation the rule of the profligate
Charles II and the bigoted James II. During this period the

CONSTITUTIONAL GOVERNMENT 71

forces making for constitutional government were still further
developing to come to their fruition in 1688 through a final
revolution.

Now that government had resumed its normal course the
traditional policy of the nation against the maintenance of a
standing army led, as a first step, to the disbandment of the
army. As the pay of the soldiers was much in arrears it was
necessary to raise at once for this purpose the sum of around
£400,000. This was accomplished by the imposition of a
graduated poll-tax, said to have been up to that time " the
greatest poll-tax, and most particular, that had been known."
No one was overlooked, from the nobility to the humblest
citizen. The charges ranged from £100 for a duke to sixpence
for " every person not rated, nor receiving alms, above
sixteen years of age." By reading this Act one may cause
to pass in review representatives of every class in the social
life of the time — dukes, marquises, earls, viscounts, barons,
baronets, knights, sergeants-at-law, esquires, parsons, vicars,
doctors of the civil or canon law, doctors of physic ; mayors,
sheriffs, aldermen, town clerks ; masters and other officers
of the livery companies ; dyers, brewers, leather-followers,
girdlers, apothecaries, tallow-chandlers and others. Then
there were the barber-surgeons, the white-bakers, the brown-
bakers, butchers, carpenters and other tradesmen. Then a
long list of those in mechanical pursuits and the building
trades. The courts' officers and clerks and the officers and
clerks of the other departments of the Government all had to
pay, and finally, to sweep in any who might have been over-
looked, " everyone that could spend, in land, lease, moneys or
stock, £100 per annum, 40 shillings, and so on for a greater
or ^ess estate." The produce of this tax is not reported, but
it is recorded that the much dreaded army merged with the
rest of the population and was quickly a thing of the past.
The King retained about 5,000 men under arms, thus laying
the foundation for a moderate standing army such as England
has since then maintained. Pending the collection of this
tax and of a special assessment on lands and movables.

72 ENGLISH PUBLIC FINANCE

arrangements were made with the city of London for a loan.
Charles was successful in inducing Parliament to settle a
permanent revenue upon him of £1,200,000 a year. This
was something many times before attempted but now for the
first time arranged. The King was to surrender all revenues
from his prerogative, such as wardships, marriages, purvey-
ance, pre-emption and the like, from which a considerable
portion of the Crown income had previously been obtained.
On the other hand. Parliament made the new appropriation a
special charge upon an excise tax upon Hquors, including not
only beer, ale, cyder, strong-water, but also vinegar and even
coffee, chocolate, sherbet and tea. The income from this
source not proving to be sufficient to produce the amount
appropriated, it was later found necessary to supplement it by
other taxes.

The remainder of this reign was marked by continued
clashes between King and Parliament. Large supplies were
required for the conduct of wars with the Dutch.

For the expenses of the first war Parliament readily voted
the requisite amount. Two notable departures were made
from former usage. The old method of raising money by
subsidies of tenths and fifteenths was abandoned for ever
and the mode of monthly assessments introduced during
the Civil War adopted instead. The clergy who used to
tax themselves in convocation now consented to be taxed by
Parliament in the same manner as the laity. In return they
obtained the right of voting at elections.

This war with its disgraceful ending, the fire of London
and the plague, all combined to make the people restive under
the necessarily heavy taxation while their incomes were
seriously curtailed.

So, when Charles in 1672 secretly began another war
against HoUand, without the consent of Parliament, he
obtained the cash resources required by confiscating the
balances of the merchants loaned to the Exchequer. This vas
the " Stop of the Exchequer " already considered. This is
the last instance in English history of such a proceeding, just

CONSTITUTIONAL GOVERNMENT 73

as the Stuarts were the last of the autocratic sovereigns.
Parliament finally forced peace in 1674 by refusing to give
further supplies. Just as it seemed as if Parliament had the
King in a position where he must abandon his autocratic
methods he succeeded in obtaining a loan from Louis of
France and Parliament did not meet again during the last
four years of his reign which ended in February, 1685,

James II

Upon his accession James II was apparently one of the
most autocratic of rulers. The people were subservient and
Parliament voted him large supplies for life. He had a large
army, although it was not well disciplined and was not in
sympathy with his religious views. However, while the
nation was much divided on the subject of religion and one
Protestant sect was cruelly treating all the others, they were
a unit in opposing his desire for Catholic supremacy. Thus
the nation was prepared to take the stand against James
which was involved in asking William the Hollander to head
an armed expedition to England. And so with the flight of
James to France ended the Stuart dynasty and autocracy.

CHAPTER XIII

ENGLAND AFTER THE REVOLUTION OF 1688

(1688-1920)

The Revolution of 1688 drew a sharp line between old
England and an England in which new conditions were to
prevail. In politics, in its economic status, in its outlook
upon the rest of the world and its relations therewith, the
nation was to experience changes of the greatest importance
to the welfare of its people.

The history of this new England naturally divides into
three epochal periods. First we have a century and a third
in which the keynote is war — war in a military sense ; war in
an economic sense. England for the English and England
against the world, including her own colonies and her sister
island of Ireland.

The dominating note of the next century is peace, accom-
panied by great political, industrial, economic and social
changes.

Then we have the brief climateric period of the recent
war — a period when England nobly and voluntarily supported
by all her Dominions and Dependencies ; joined hands
with France, Italy, America and other allies, to save from
destruction their common civilization.

Origin of the National Debt

The great financial engines which provided the power to
make this victory possible had their genesis during the closing
years of the seventeenth century. The ideas which gave
them birth were probably of Dutch origin, brought with him
from Holland by William III. These were public borrowing
and banking. Prior to 1688 there had been no such thing
in England as a national debt. The sovereigns had frequently
borrowed money but these loans were transactions with
special groups of moneyed men and in no sense borrowings

ENGLAND AFTER THE REVOLUTION OF 1688 75

of a national character, raised on a systematic basis. As
an alien, King William hesitated to burden the people too
heavily with taxation and therefore to meet the expense of
his wars resorted to borrowing on a large scale.

The Bank of England

In 1694 the Bank of England was incorporated.

This was the first incorporated banking institution in
England. Its charter, which was granted 24th July, 1694,
provided that in exchange for a loan to the Exchequer of
£1,200,000 the incorporators might deal in bullion and bills
of exchange, issue notes and make advances on merchandise.
It was a private undertaking and so remains to the present day.
On the other hand, it performs important public functions,
such as the management of the public debt and finances.
Its history, privileges and responsibilities are discussed in
detail in subsequent pages.

The Exchequer, or Treasury, Bill

The first Exchequer bills were issued in 1696. As originally
issued they were a form of Government currency.

Their subsequent use has been to bridge over the period
between expenditure and the receipt of income from taxation
or from long time loans. They have served as the shuttle
which wove into the fabric of Government resources the
floating capital of the realm. Since 1877 Treasury Bills
which perform the same functions have taken their place.
The principal difference between these two classes of bills
is that the Exchequer bills were paid with accrued interest
while Treasury bills are issued at a discount and paid off at
par.

The Income Tax

Another mighty engine of public finance, the income tax
in its modern form, was not provided until late in the next
century. This tax was first levied in 1799 at the instance of
William Pitt, the younger, as an aid in the financing of the

76 ENGLISH PUBLIC FINANCE

first part of the Great French War. It was levied at the rate
of 10 per cent, on all incomes of two hundred pounds and
above. In the first full year of its operation it provided about
four and a half million. Compare this, even after making
liberal allowance for the greater purchasing power of the £
sterling in Pitt's time, with the return of the last fiscal year
(1919-1920) of nearly three hundred and sixty million, or,
with excess profits tax added, some six hundred and fifty
million. Its prototype, first levied in the reign of Richard I,
may have yielded forty thousand pounds — exact figures are
not available.

Joint-Stock Banking

Then, in this survey, we must not overlook the importance
of the introduction of joint-stock banking in England in 1826,
and the extension of the privileges of such banks to the City
of London in 1833. The marshalling of the credit resources
of the world through the agency of these banks and of the
great acceptance houses made England the financial clearing
house for the world's trade. Thus there were concentrated
in London great reservoirs of credit which made it possible
for England to carry so heavy a part of the financial burden
of the recent war. The combined financial resources of
England and America mobilized through their private cor-
porate banks and their respective semi-state banks, and Bank
of England and the Federal Reserve System, provided the
credit resources without the use of which the war could not
have been fought to its successful climax.

Public Expenditure

We may now turn to a consideration of the uses to which
moneys were put which were made available by this financial
machinery of taxation, borrowing and banking. We find in
the requirements of war the greatest cause of the creation
and growth of public debt. War, the preparation for war,
the aftermath of war in the form of pensions and the interest
upon the public debt, accounts for over 85 per cent, of the

ENGLAND AFTER THE REVOLUTION OF 1688 77

total expenditure of the nation from the Revolution until
the present time. In this connection the tables of expenditure
and of income from 1688-1920 printed with Chapter XXV
will be found worthy of special study.

The Tariff

Finally, we may consider the use of the taxing power for
other purposes than to produce income. Until 1842 England
possessed a highly protective tariff, designed to promote the
interests of the land owners and the manufacturers. Up to
that time the customs tariffs were devised both with a view
to giving this protection and to obtaining revenue. This
was also true of some internal taxation. In 1846, largely as a
sequence to the Irish famine of 1845, the corn laws were
repealed. Thereafter the other protective duties were
gradually removed, so that, since 1866, England has enjoyed
absolute free trade.

England in 1914

At the time of the outbreak of the recent war England
was the richest of the nations, so far as developed resources
were concerned. Her commerce was world-wide, her manu-
factures went everywhere, carried for the most part by her
own ships. These also carried a large percentage of the
goods of other nations, especially foodstuffs for home con-
sumption and the raw materials of manufacture for which
England is dependent upon the rest of the world. England
in 1914 was the world's banker and her capital was invested
in the promotion of industry and transportation not only at
home and in her own colonial possessions, but in many other
countries, especially in the Americas.

The Future ?

The recent war has brought about important changes in
all of these relations. It is too soon as yet to determine to
what these changes will lead. Much depends upon the
Enghsh working-man and working-woman. By the progress

78 ENGLISH PUBLIC FINANCE

of events he and she have now largely devolved upon them
the decision as to what shall be the future history of the
nation. For good or ill over the centuries, slowly, almost
imperceptibly at first, but finally with great rapidity within
the last fifty years, this power has come to them.

CHAPTER XIV

WAR AND DEBT
(1688-1817)

The period of English history extending from the accession
of William III to the close of the Napoleonic wars was one
marked by a succession of wars and a steady growth of debt.

In 1688 the only debt of the nation consisted of some
£384,000 of temporary obligations for arrears due to the
army and for other demands arising from the Revolution.
There was also in litigation the claim of the Goldsmiths for
reimbursement of the amounts seized from them by Charles II
at the time of the " Stop of the Exchequer " in 1672. This
claim was later adjudicated at ^^664,263. So the entire
debt as of 1688 was a little over one million pounds.

In the century and a third lying between this date and
1817, when the expenses of the Great French War were
finally determined, the bulk of the public debt of England
as it stood prior to the recent world war was created. The
wars of William III were the cause of £18 million of debt
and the wars of Anne of £33 million more. The Spanish
Right of Search War and the War of the Austrian Succession
piled on another £31 million. The Seven Years' War added
£57 million, the American War £116 million, and the Great
French Wars £612 million. The total debt at the end of the
period, allowing for some reductions during the intervals of
peace lying between the different wars, was £850 million.

The table on page 81 summarizes these data. It also
affords comparisons not only of one period with another,
but also with the national wealth. It is interesting to note
how the growth in population and in wealth kept pace to a
measurable extent with the growth of the debt. This was
especially the case during the last 50 years of the period.
A table giving similar comparisons of the debt charge for

80 ENGLISH PUBLIC FINANCE

the same periods with the national income may be found
on page 116.

Public Finance in the Reign of William III

The reign of William III was marked by active warfare
at home and abroad. At home there was the cruel war for
the reduction of Ireland. Abroad there was constant warfare
with France, which had espoused the cause of the deposed
King, James II, and also was at war with England's ally,
HoUand.

The expenditures during the reign of James, which had
been called "crushing," had averaged ^^2, 168,000 a year.
They mounted to an average of nearly £5 million in William's
reign. This state of affairs constituted a serious menace to
the stability of the new government, not altogether removed
by the final victory. To cope with such a difficulty William
had the advantage of the experience of the Dutch in financial
matters. In the Bank of Amsterdam, established in 1609,
the Dutch possessed one of the three important banks of the
time. England was rich and had come to understand and
to engage actively in company promotion and in stock specula-
tion. Domestic business was active, much capital having
been invested during the war in the manufacture of goods
of a class formerly imported from France. There had also
been an active development of mining ventures, water supply
companies, munitions factories and other undertakings.

As the war progressed, French commerce was driven off
the seas. England was rapidly becoming the greatest
commercial country in Europe.

The Bank of England Founded

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

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82 ENGLISH PUBLIC FINANCE

to finance the growing requirements of the Government, and
also of the commercial classes, it found a ready response,
and in 1694 the 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
investment in the public funds.

It is an interesting fact that the methods of public borrowing
introduced during the reign of William III comprised prac-
tically 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 Accounts, 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.

CHAPTER XV

EARLY FORMS OF THE UNFUNDED DEBT

(1688-1707)

The 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
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

84 ENGLISH PUBLIC FINANCE

was spoken of as borrowing on tallies. The 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
shilUngs and three pence, for paying off and disbanding the Forces
raised since the Nine and twentyeth of September, One thousand six
hundred seaventy 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 and six thousand fower hundred sixty-two pounds,
seaventeene sliillings, and three pence, arising by virtue of the said Act

unto or his assignes, the summe of in repayment of

soe much money lent by him unto hi? 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 Exchequer, 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, together 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
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.

EARLY FORMS OF THE UNFUNDED DEBT 85

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 suffered 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 naval Sf rvices.
In fact it was especially in connection with naval 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
during 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
1751 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 interest.
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 endorsements
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

86 ENGLISH PUBLIC FINANCE

due by the Government, and exchangeable for ready money
on demand at the Bank of England. An allowance of 4 J 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 circulat-
ing medium was regulated by raising or lowering the
denominations in which they were issued.
The Exchequer bills first issued were worded as follows :

EXCHEQUER BILL.
Reign of William III.
No. 188. Exchequer,

26th 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 Receiv" or Collectors of any Ayds Taxes or Supplys
for the service of the War for the year 1697 (except ye III ShiUing
Ayd), to be reed and satisfied by y* said Receive or Collect" under
ye Penalties in ye Act contained.

R. Howard. A farthing a day (LS.)

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 to-day by insurance companies.

The seller of an annuity agrees, in consideration of the
receipt 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
speculate upon the probable life of the purchaser, the latter
to increase 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
principle 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
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,

88 ENGLISH PUBLIC FINANCE

or an agreed proportion thereof, would go to the final
survivor.

The loan of 1692 for £1 million was offered on this basis,
the benefit of survivorship to last until the group was reduced
to seven. The idea was new in England and not understood,
so the loan was a failure, only ;fl08,000 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 eighteenth century. It was often used in
combination 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 Government. Similar
was the policy of Parliament in forcing the East India Com-
pany to pass on to the Government in exchange for its
obligations the proceeds of its sales of stock. 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 1711,
and of John Law's Mississippi Company which had such a
meteoric career a few years later in France.

EARLY FORMS OF THE FUNDED DEBT 89

The East India Company

The original East India Company was chartered by Queen
EUzabeth 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 Magellan.

The company opened up trade with India and became a
rich and powerful corporation. The success of the company
led to efforts 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 million. When
the stock was offered, 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
romances of commerce. It was through its efforts that the
great Empire of India was won for Great Britain. Its
famous " East Indiamen " held unquestioned pre-eminence
among the merchant vessels of the world down to the middle
of the nineteenth century. Some of the most stirring chapters
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.

The South Sea Company

The most spectacular operation based upon the fund of
credit idea was that with the South Sea Company. This
company was at its inception to all intents a government

90 ENGLISH PUBLIC FINANCE

undertaking, although incorporated (in September, 1711) as
a private company. It received a charter giving it exclusive
trading rights to the east coast of South America with certain
limited exceptions and a monopoly of trading in the Pacific
Ocean, including the entire American Pacific Coast. In
consideration of these trading rights, which were expected
to have great value, the company was to offer to exchange
its stock for the outstanding unfunded government debt
and in addition was to pay the Government £500,000. 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 offer was accepted, up to the close of 1711, by the
holders of upwards of £9 million of government obligations.
Fmther exchanges and adjustments, in 1714, made the
capital and the debt balance at an even £10 million. 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
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
£50 million 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, converted
their holdings the company was to pay the Government

EARLY FORMS OF THE FUNDED DEBT 91

£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 5 per cent, per
annum upon its obligations acquired by the company. It
was agreed that after 1727 the interest rate should be reduced
to 4 per cent. The advantage to the nation lay in this
saving of 1 per cent, in interest and in the receipt of the
cash payment of £1\ million. Manifestly, even if trading
rights were restored, which was part of the programme, there
was no legitimate basis for such a payment by the company.

The Outcome of South Sea Scheme

The profit to the promoters was to come from stock market
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 surrendered
— 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 1,050. 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
carried 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,

95^ ENGLISH PUBLIC FINANCE

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
prices. The Government had to surrender its right to the
£1\ 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 5 per cent, per annum until 1727,
and then 4 per cent., which yielded a corresponding return
upon the company's stock. The conspirators were severely
punished by loss of office, imprisonment 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 disfavour 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.

CHAPTER XVII

STATE LOTTERIES AND LOTTERY LOANS

(1694-1826)

The 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.

The First English Lotteries

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
record 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 million.
It was offered in shares of £10. Annuities of £14 per cent,
for 16 years were variously apportioned, £14 per cent, on
every share and a larger proportion 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.

There were seven lottery loans from 1711 to 1714 in
the reign of Queen Anne which yielded to the Government
£9 minion, but the bonuses paid to the holders of fortunate
lottery tickets amounted to £2,734,000.

94 ENGLISH PUBLIC FINANCE

The use of State lotteries in connection with the Spanish-
Austrian War financing, 1743-1748, gave a guise of respecta-
bihty 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 million

the Treasury offered for every £100 subscribed —

i s. d.
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 per cent, stock at par with a 10s.
short annuity ; the two following were in 3 per cent, stock
at par with more liberal annuities. Then came another at
4 per cent, at par with an annuity. Finally with the growing
necessities of the Government and increasing depreciation
of government stock it was necessary in 1781 to offer, for
£12 million in cash, £18 million 3 per cents and £3 million fours.
Again, in 1782, for £13| million cash, the Treasury gave the
same amount in threes, 50 per cent, 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 per cent, in fours, but in
1784 it was necessary to give 50 per cent, again, but a smaller
annuity was given.

Every one of these loans carried the privilege of pur-
chasing, at £10 each, a certain percentage of lottery tickets.
For instance, in connection with the £6 million loan of 1778

STATE LOTTERIES AND LOTTERY LOANS 95

there were 48,000 lottery tickets. Each subscriber of £1,000
received an equivalent amount of 3 per cent, stock and an
annuity for 30 years of £2 10s. on each £100, practically
5 J per cent, 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 £1,000 received
£1,000 in 3 per cent, stock, £500 in 4 per cent, 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,
acting merely, as it were, as an agent or stake holder, being
benefited 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
" underwrote " the sale of the loan, but we knov/ 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
payment 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 per cent, interest for money, it was apparently deemed
improper for the State to offer a higher rate. Therefore in
order to draw capital to the Exchequer it was deemed necessary

96 ENGLISH PUBLIC FINANCE

to make the offering attractive in other ways than by directly
giving a higher rate of interest. The Treasury oflficials seem
to have thought chiefly about the addition which the debt
charge would make to the budget. They were not much
concerned 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
negotiable. At the same time they very naturally wanted
such terms as would afford opportunities for a handsome
profit on their part, if not at the time, at any rate in the subse-
quent dealings in the market. Hence it became customary
during Lord North's incumbency of the Exchequer, as already
stated, for every £1,000 in money to give 3 per cent, and
4 per cent, 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 instance, with the privilege of
purchasing a certain percentage of lottery tickets. The
subscription was still further " sweetened " by making the
money payable in instalments 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.

For the payment 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 discount.

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.
Experience showed that an immediate sale could be made of
these tickets at a profit of from 2s. to 3s. 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

STATE LOTTERIES AND LOTTERY LOANS 97

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

i s. d.
1st ;^100 3% stock having a market value

of, say . . . . . . 60 - -

2nd ;^50 4% stock having a market value of,

say . . . . . . 40 - -

3rd A long annuity for 17s. 6d., whose

capitalized value would be about . 17 13

4th Three-tenths of a lottery ticket by which

he would have a profit of, say . . 11-

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 . 2 - -

Total ;^120 2 3

It does not necessarily follow that these prices were realized
by the lenders. For instance, the price of 3 per cent, stock
fluctuated in 1782 between 61 and 53f. However, the
terms of the loans at this period were liberal and the
opportunities for profit were good.

The different 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, 1784- 1826

We may now conveniently give the further history of the
State lotteries.

7— (1823)

98 ENGLISH PUBLIC FINANCE

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," teUs us that the method pursued by the
Chancellor of the Exchequer in placing the lottery tickets was
to invite a few of the leading stockbrokers 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 ;flO tickets —
all to be distributed as prizes. He would then ask at what
price they would tender for them. A competition would
then ensue and finally an offer might be accepted of, say, £5
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 £10." There were even lottery
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 deahng in lottery tickets

STATE LOTTERIES AND LOTTERY LOANS 99

or shares in tickets. We are told that no small part of the
business of the stockbroker consisted of dealings in lottery
tickets. There were also many disreputable persons who
devised 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
up. Of course these insurances were illegal, but they were so
profitable to the office-keepers, 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
domestic 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 drawing 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 feehng that it
should be abohshed — still, it was not until 1826 that en-
lightened pubhc opinion finally forced its discontinuance.

Those who favoured the lottery claimed that properly
conducted it was a voluntary tax, contributed to only by
those who could afford 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
drawings. In 1809 this abuse was done away with and the
lottery was decided in one day. Ashton tells us that extra-
ordinary 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

100 ENGLISH PUBLIC FINANCE

million, but the expenses of management and prizes absorbed
over £33 million. Thus the net income from this source was
about £12 miUion or about ;£218,000 a year for the 55 times
between 1755 and 1826 when this method of raising revenue
was used.

CHAPTER XVIII

THE SINKING FUNDS

We may now profitably consider the early sinking fund
operations. There were two of these, known respectively
as Walpole's sinking fund and Pitt's sinking fund.

Walpole's Sinking Fund

When Robert Walpole became Chancellor of the Exchequer
in October, 1715, the pubhc debt, including the capitahzed
value of the annuities, amounted to around £50 miUion
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 million. A capital levy
was being seriously 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 20th May, 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 25th December, 1716.

By Christmas, 1727, £6,626,000 of this old debt had been
retired, but in the interval it had been necessary to borrow
new money so that the debt had actually increased about
£2 mini on.

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

101

102 ENGLISH PUBLIC FINANCE

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 £1 milhon.

Pitt's Sinking Fund

If the people of Walpole's time were appalled at the size
of the debt, those hving 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
Chancellor 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
dangers of a pubhc 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 milhon pounds a year was to be taken from revenue
and paid to the Commissioners for the Reduction of the
National Debt, in whose favour also the existing hfe 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 million, after
which, dividends on capital stock to be paid off by them,
and any hfe and terminable annuities which should mature,
should cease and be considered as redeemed. Subsequently
;i(^400,000 a year was added to the fund ; also a sum equal to

THE SINKING FUNDS 103

the interest saved by any reduction of interest on any
redeemable stock ; and 1 per cent, on all new loans issued
for public purposes.

Fallacy of Pitt's 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
interest will double itself at 6 per cent, in about twelve years,
at 4 per cent., in about eighteen years, and so on, is undeniable,
but the error lay in assuming that to buy up and " keep alive "
the Nation's own obhgations 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
taxation alone, it would have accomphshed its purpose. But
this would not have been because of the accumulations
from compound interest, but because an amount, determined
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
other country, or in Mars, to accumulate at compound
interest, 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 cHmax, 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
numerous pamphlets : " As to Mr. Pitt's project of paying off
the National Debt, by applying a miUion a year for that

104 ENGLISH PUBLIC FINANCE

purpose, while he continues adding more than £2Q 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 £322 milhon had been
raised at an average cost of £5 Os. 6d. per cent, per annum, to
pay off debt carrying interest at £A 10s. per cent. The
difference between these two rates is 10s. 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 £1,690,000 !

Modem 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
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
unwiUingness of Parhament to make any substantial appro-
priations for the purpose. The terms of existing sinking funds
are given in notes, following the National Debt Statement.

In 1868, and again in 1894, the 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
operation of 1720 and before. The advantage of the operation
is hard to find, as the Government of course remains obligated
to the Saving 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 and 1817.

Refunding Operation of 1749 — ** Consols "

Advantage was taken of the period of peace which followed
the War of the Austrian Succession to take measures 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 contracted at
different periods under several Acts of Parhament and
charged on many distinct funds.

Parhament enacted a law in 1749 that all pubhc creditors
at 4 per cent, should be paid the amount of their holdings
except those who signified their consent to accept 3 per cent,
after 25th December, 1757. These were to have their
present interest continued until 25th December, 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 favourable, 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 milUon. As a result
of these operations and the payment of £3 miUion navy debt,
there was a net decrease, in round figures, of nearly £5 million
in debt before the outbreak of the Seven Years' War and a
reduction in the annual charge of ;^539,000. As an indication
of the state of the national credit it may be noted that the
3 per cents, which in 1748 sold as low as 76 advanced to

105

106 ENGLISH PUBLIC FINANCE

an average price of about par in 1749-1751, 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 consohdating
certain of the 3 per cent, issues into one joint -stock of 3 per
cent, 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 in 1784

In 1784, when WiUiam Pitt the younger assumed the
duties of his office as Chancellor of the Exchequer, he found
outstanding floating debt for over ;fl8 million, chiefly in
the form of navy victualhng and transport bills. From the
time of Charles II the payments for navy victualling and
stores had been made in bills payable at uncertain periods.
They were taken at a discount which increased very con-
siderably at every time of war. During the last five years
of the American War this discount had varied from 11| per
cent, to 16| 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
discharged 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 per cent, stock £6,400,000 in 1785, and ^^9,800,000
in 1786, giving for each ;^100 debt ;^107 10s. 6d. in the first
instance and ;^111 8s. in the second. Pitt was desirous of
completing the entire transaction in 1785, but in deference to
the views of the bankers spread the operation over two years.

EARLY REFUNDING OPERATIONS 107

In view of his later change of poUcy in that respect it is of
interest to note his statement to Parhament, " that a fund at
a high rate of interest is better to the country than those at
low rates ; that a 4 per cent, is preferable to a 3 per cent,
and a 5 per cent, better than a 4." He explains — " the reason
is that in all operations of finance we should always 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 pubhc 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 offer the lowest terms. Sealed
tenders were required. He thus established a salutary
precedent which has been followed in connection with all
subsequent loans not offered at fixed prices. It may be
noted in passing that the purchasing of army supphes was
placed by him on a similar competitive basis, thus ending
scandalous practices of long standing.

CHAPTER XX

FINANCING THE GREAT FRENCH WAR
(1793-1817)

The 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 21st January, 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
England had enjoyed since the American War and the hope
of a further similar period was abruptly ended. The adminis-
tration 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, perhaps 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 hardships 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
revulsion and derangement of commercial credit." There
were many failures of mercantile houses, while no less than
twenty-six country banks were forced to close their doors.
In April, 1793, the distress became so acute that the Govern-
ment found it necessary to apply extraordinary remedial
measures. At a meeting of merchants held at the Mansion
House on the 23rd 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

108

FINANCING THE GREAT FRENCH WAR 109

to Parliament and on the 29th of April, Exchequer Bills to
the extent of £5 million 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 unnecessary in most cases to ask for it.

The Loan of 1793

It was in such a market as this that William Pitt was com-
pelled to arrange for his first war loan of £4,500,000. This
loan was obtained by a sale of 3 per cent, consols at 72,
making the money cost about 4^^ per cent, 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
almost immediately to around 77 and did not go below 74
during 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 seUing 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
seUing relatively much lower — ^that is, on a higher interest
basis.

The war thus entered upon lasted until the middle of the
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
involved. Each nation was ready for a cessation of hostihties.
Nothing had been decided, and, in the settlement, Great Britain
gave up practically all acquisitions of territory which she
had made. Great Britain expended during the nine years
about £420 miUion, 60 per cent, of which represented the cost
of maintaining the army and navy, against a normal peace

110 ENGLISH PUBLIC FINANCE

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 " American War, 55'60
per cent, was raised by taxation and the remainder by
borrowing.

The Loyalty Loan of 1796

During this period there were eighteen different loan
negotiations. 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 4^ per cent. In Decem-
ber, 1796, the money cost over 5J per cent., while in 1797
and 1798 it cost from 6^ to 6| per cent. In 1799 and 1801,
5| per cent, was paid, but in 1800 over £20 miUion was
secured at about 4| per cent. Most of the loans were issued
as threes with annuity bonuses and in some cases with a
percentage in fours. The rate on Navy and Victualhng Bills,
issued as fives repayable after relatively short periods, was
substantially higher than that paid on the annuities. The
average actual rate paid on all loans, long and short, was
almost exactly 5J per cent.

The Loyalty Loan issued in December, 1796, was offered
for pubhc 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
threatening the suspension of specie payments which took
place in February of the following year, and symptoms of
discontent had appeared in the army. Under these circum-
stances, 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

FINANCING THE GREAT FRENCH WAR 111

fifteen hours the entire £18 milhon was over-subscribed.
However, the loan was at 4 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 (1803-1815)

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, and thus to arrive at a settlement which would be con-
clusive. Notwithstanding the fact that they caught Napoleon
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
Enghsh people rather than of great leaders. Pitt, who had
dominated the first period, was out of office when hostiUties
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 20th November, 1815, the annual
expense just about doubled that of the first period. Elim-
inating 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
£28 miUion and of the second period £62 million.

Taking the entire period of twenty-three years of war into
consideration the total cost in round figures was about £1,200

RETURN TQ-

BUREAU CF INTERKATICNAL RELATK^^

384 LIBRARY ANNEX
UNIVERSITY OF CALIFORNIA?.

112 ENGLISH PUBLIC FINANCE

million, a yearly average of £52,150,000. This total is
accounted for as follows : Direct increased military and naval
expenditure, ;f826,223,000, increased cost of civil government
;^111,212 000, increased debt charge £262,077,000. The
extraordinary expenses of 1816 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 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
expenditure 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 £4 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 million. The two other great wars
of England preceding 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 setthng international disputes. How frequently we find
upon the conclusion 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 Eng-
land'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.

FINANCING THE GREAT FRENCH WAR 113

The Cost Met from Taxation

The financing of the war covered the Exchequer period
from 10th October, 1793, to 5th January, 1817. It is im-
possible 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
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. How-
ever, this fact does not seriously interfere with securing a
review of the finance of the period.

The striking thing to note is that eUminating all items
having to do with the debt, the other expenses were entirely
met from revenue collections. The expenses of civil govern-
ment averaged ;f6,708,000 a year and the mihtary expenses
£39,213,000, an aggregate of about £46 million. The revenue
receipts averaged £49,575,000 a year ; or, taking the aggre-
gate figures for the twenty-four years, civil and mihtary
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 twenty-four 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.

8— (1823)

114

ENGLISH PUBLIC FINANCE

The operations on account of the debt ran into heavy
figures as will be seen from an examination of this table.

SUMMARY OF DEBT OPERATIONS.

Great French Wars.

October, 1792 — February, 1817.

In Millions Sterling.

Money Values.

Credits.

Debits.

Gross amount borrowed .....

Disposition —

Debt paid off

Interest and management on new or war debt
Net benefit to Exchequer from war borrowings

1,315

881
283
151

1,315

Thus the net benefit to the Exchequer from net borrowings
of £434 million, money values, was only £151 million, 11^ per
cent, 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 million, an increase of £610,337,000
— par value. The debt charge meanwhile had increased
£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 sinking 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 16s. 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.

Debt V. National Wealth

The burden of the debt upon the community, while heavy.

FINANCING THE GREAT FRENCH WAR 115

was by no means " crushing," a term by which it has
frequently been described.

The per capita debt was about ;f50 sterUng, or not quite
one-third of the estimated per capita national wealth. At
the close of the American War, another period when the
debt was " crushing," the per capita amount was estimated
at about £2d and the debt at about 25 per cent . of the national
wealth. These estimates all deal with par values.

Debt Charge v. National Income

On account of the pohcy 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 1775.
At that time the national income was estimated to be ;^100
million. At the close of that war an increase of about 25 per
cent, is estimated to have taken place. At the beginning
of the Great French Wars the people of England were probably
in receipt of an aggregate income of £160 million. So far
our estimates apply only to England and Wales. In 1802
we may add Scotland and, too, we are now deahng with more
rehable figures, as we begin to have the income tax returns as
a basis. We seem to be warranted in accepting an estimate
of £230 million for the national income at this date. At
the close of the Napoleonic wars in 1815 we have an estimated
income for the 17 million people of the United Kingdom
of Great Britain and Ireland of £400 milhon.

It is beheved 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
enormous excise taxes.

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u rt g

« O <u

FINANCING THE GREAT FRENCH WAR 117

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 116. 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 to-day covering the entire period and could
adjust money values accordingly we would probably discover
that to-day'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 hke 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 vitahty 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
she was enabled to finance her trade on an ever increasing
scale as well as to finance the stupendous costs of the twenty-
three years of war. Sowing and reaping in national finance
is thus illustrated.

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 plenty of the abihty
of the nation to continue to meet its obhgations, 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.

CHAPTER XXI

REVENUE AND EXPENDITURE
(1688-1817)

During the centuries which preceded the EngHsh Revolution
of 1688, the Enghshman had held the reins over his auto-
cratic rulers and had finally won a state of comparative
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
Parhament 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 pcirt of the supplies, the Commons were able
to control, to some extent at least, the acts of the King.

When William HI consented to assume the responsibihties
of the throne in 1688 he expected that the usual grants would
be made to him. To this Parhament 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 Parhament .

It is not our purpose to consider in detail the various forms
of State expenditure, nor do we intend to take up in detail
the methods of raising revenue during the period under
review.

Purposes of Expenditure

The broad general purposes of expenditure were, as they
are to-day, the expenses of civil government, the expense of

118

REVENUE AND EXPENDITURE 119

the maintenance of the military establishment and the charge
for the interest upon the national debt.

An inspection of the table on page 120 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 Revolution
until the end of the French wars, and for the peace period
immediately following.

The important facts to notice are the progressive increasing
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
Wilham III cost on the average about £5 million a year.
The mihtaristic 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 50 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 averaged
nearly twice those of the first part. With these figures
in 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,
the average annual budget was ^^3,800,000 ; 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 1815, 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

120

ENGLISH PUBLIC FINANCE

necessary after each war to maintain the military establish-
ment 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.

Character of Period.

Peace.

War.

1688-1697

Wars of William III . . .

5.1

1698-1701

Peace

3,8

—

1702-1714

Wars of Anne

—

7,6

1715-1739

Peace

5,7

—

1740-1749

Spanish- Austrian Wars

—

9,5

1750-1755

Peace

6,6

—

1756-1766

Seven Years' War ,

—

14,5

1767-1775

Peace

9.9

—

1776-1785

American War

—

21,8

1786-1792

Peace

16,6

—

1793-1802

1st Period— Great French War

—

45,4

1803-1817

2nd Period — Great French War

—

80,5

1818-1830

Peace .....

56,2

—

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. During
the second part of the Great French War the income tax
assumed great importance, yielding almost as much as the
customs.

REVENUE AND EXPENDITURE

121

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
Expenditure table, may be studied with profit.

GOVERNMENT REVENUE 1688-1830.

Average per Annum for Alternate Periods of War and Peace

In Millions Sterling.

Peace.

War.

Period.

Character of Period.

Tax.

Debt.

Total.

Tax.

Debt.

%»

1688-1697

Wars of William III

3,6

1,8

6.4

66-43

33-56

1698-1701

Peace

4,6

—

1702-1714

Wars of Aniie

5,4

2,3

7.7

69-55

30-40

1715-1739

Peace

5.9

—

1740-1749

Spanish- Austrian

Wars .

—

6,6

3,0

9.6

68-91

31-08

1750-1755

Peace

7,1

—

1756-1766

Seven Years War .

9,1

5,5

14,6

62-62

37-37

1767-1775

Peace

loT?

—

1776-1785

American War

—

12,7

9,4

22.1

57-39

42-61

1786-1792

Peace

17,0

—

1793-1802

1st Period \ French
2nd Period / War

26,2

20,9

47.1

55-60

44-40

1803-1817

—

64,4

16,4

80,8

79-70

20-30

1818-1830

Peace

68,0

■""

*""

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 pubhcist. 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 established
innovations in State finance of far-reaching importance.

Sources of Revenue — ^Tariff Reform

During this period England was transformed from a country
surrounded by high tariff 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 commodities
upon which customs duties were collected from 1200 in
1842 to 466 in 1853, and to only 48 in 1860. By 1880 the
number of classes of articles upon the tariff had been reduced
to 10. In 1914 substantially the entire customs revenue was
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 a

122

PEACE AND SOCIAL BETTERMENT 123

substantial revenue. 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 1842 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 31st
March, 1914, was £18,700,000, a reduction of £14,200,000
from the year 1817 when the maximum charge was reached.

Military and Naval 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 (1854-1857) affected by the financing
of that war ; but, eliminating this special feature, we find
the cost of the military 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 £5
inillion 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 £431 million,
over £100 million a year. However, for the peace period of
over ten years following that war the military burden averaged

124

ENGLISH PUBLIC FINANCE

annually over 50 per cent, higher than it had averaged in the
four 3'ears preceding the war. In the fiscal year ended 31st
March, 1914, the military establishment cost over £11 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 (1854-1856) these expenditures called on the average for
about ;^9 million a year, increasing during the last decade
to about £10 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 —

CIVIL GOVERNMENT v. MILITARY EXPENDITURE.

In Millions Sterling.

Years Ended
31st March.
1909
1910
1911
1912
1913
1914
* Postal expenses eliminated.

Civil 1

Military

49,7

59,0

55,7

63,0

60,9

67,8

67,4

70,5

70,1

72,4

75,2

77,2

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 the expenditure for

PEACE AND SOCIAL BETTERMENT 125

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 £19 million, twice the 1895 amount. To
complete the record we may note that this sum had again
doubled in the year ended 31st March, 1920, and that the
budget figure for the current year (1920-1921) is £56 million.
The introduction of old age pensions in 1908, and of health
insurance in 1911, added another similar amount to the
annual expenditure by 1913-1914, and these expenditures
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 table on the next page, giving the distribution of the
civil government expenditure at the end of historical periods
from 1833 to 1914 inclusive, offers further interesting
data.

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 and a steady
increase in military expenses, even during a prolonged period
of an almost complete absence of war.

Debt — Refunding

Since 1817 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 3 per cents, of various issues were refunded
into 2 J 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| per cent, after 1903. These are the consols
of to-day. Mr. Gladstone had previously endeavoured, in

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PEACE AND SOCIAL BETTERMENT 127

1853, to effect a somewhat similar operation but the conditions
at the time were unfavourable to the success of the under-
taking. An operation undertaken in 1884 was likewise
unsatisfactory in its final outcome, as it resulted in a saving
of only ;^46,756 a year on some £22,362,000.

Some Comparisons

On 5th January, 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 1817 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 to-day we roughly calculate the
capital value of the annuities outstanding in 1817 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 million,
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 income of £400 milhon, while at the later date it was
only a trifle over 1 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
purposes amounted in 1817 to £71 million, about 18 per
cent, of the national income ; in 1914 the expenditures
of the Government had risen to £212 million but this

128

ENGLISH PUBLIC FINANCE

amount was not quite 9J 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.

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 .

11,800

139

1.850

141

Stated Per Capita and Percentage.

Date.

Natl.
Wealth

Debt

Natl.
In-
come

Debt
Charges

Gov't.
Expenditure

Per
Cap.

/o
Wealth

Per
Cap.

Income

Per
Cap.

%
Nat'l.
Income

Jan. 1817
Aug. 1914

159
315

£
50
15

31-5
4-9

£ s.

23 11

49 -

£ s.

1 17
0 10

8-00
106

£ s.

4 4
4 7

18-0
9-4

Changes

156

26-6

25 9

1 7

6-94

8-6

In words of Sir Stafford H. Northcotc, writing in 1862, the
great advance of the British nation from 1817 to 1914 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."

PEACE ^ND SOCIAL BETTERMENT 129

To these general causes he added the great improvement
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.

9— (1823)

CHAPTER XXIII

THE ANCIENT EXCHEQUER

There is every evidence that the early kings had in use
well developed methods of adniinistering their finances.

The 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
cashier 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
sanction 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.

The Accounting

The King's revenues were collected by the Sheriffs and by
them were twice a year, at Easter and at Michaelmas (the
day after the feast of St. Michael, about the end of September),
paid to the King's treasury.

On the appointed day the Sheriffs would bring their
accounts and the money which they had collected to the hall
in which the settlements were to be made, known as the

130

THE ANCIENT EXCHEQUER 131

Receipt 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 courtiers.
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 accounts
as they affected their interests were correctly stated. The
Sheriff upon approaching the table would place on it his
receipt tallies and the silver coins for use in settling his
account. 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 representing
any credits due to him. Thus was visualized the state of
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 duplicate
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 carefully
preserved until the next settlement.

132 ENGLISH PUBLIC FINANCE

Tallies

These tallies were sticks of some hard wood on one side of
which notches were cut of peculiar shapes and sizes corres-
ponding to the figiires 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
settlement 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 10th of October of that year
we read in the Gentleman's Magazine that the most ancient
revenue department in the State, the Receipt of the Exchequer,
terminated ; also that on the 16th 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 the
English 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. Wlien 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 EXCHEQUER 133

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.

CHAPTER XXIV

THE MODERN FISCAL SYSTEM

The 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."

The Budget

The policy of the English budget is settled by the Chancellor
of the Exchequer and the details worked out by the permanent
staff of the Treasury. The budget is presented by the
Chancellor to the Commons usually in April or May. Some-
times a supplementary budget is presented in the Autumn.
Previous to the presentation of the budget a financial state-
ment containing carefully prepared estimates of revenue
and expenditure 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 estimates for that
year. At the time of presentation the Chancellor explains, —
usually in great detail — the reason for the proposed methods
of taxation or borrowing to be followed in obtaining the
revenues necessary with which to meet the expenditures.
Many of the budget speeches have been notable for their
lucidity and interest. Gladstone's budget speeches were
among his greatest efforts. Parliament can approve or reject
the recommendations of the budget but does not add to its
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,
and the salaries for the higher judicial officers. These are

184

THE MODERN FISCAL SYSTEM 135

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-roDing 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 Public Tresisury

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, the Chancellor
of the Exchequer, 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.

The political heads of the Treasury are the First Lord
(practically always the Prime Minister), the Chancellor of the
Exchequer, a Parliamentary Secretary, a Financial Secretary,
and three, or sometimes four, Junior Lords, the fourth Junior
Lord not being a paid official. The First Lord does not
concern himself with the actual management of the affairs
of the department of which he is nominally the chief officer.
He has the patronage of the board, save in so far as he dele-
gates it in minor matters to the ParUamentary Secretary,
and nominates for approval by the Sovereign the incumbents
of certain Crown livings. He also recommends to the Sover-
eign the names of persons to be the recipients of civil Ust

136 ENGLISH PUBLIC FINANCE

pensions or royal bounty. The three (or four) Junior Lords
have certain minor duties in connection with the Treasury,
but their real duties consist in acting as assistants to the
ParUamentary Secretary of the Treasury, who acts 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 parUamentary matters. A Treasury Minute often
concludes with the words " My Lords approve," and the
Junior Lords affix their names formally to innumerable
documents which they are not expected to peruse and for
which they take no responsibility whatever.

The Chancellor of the Exchequer and his Aids.

The Chancellor of the Exchequer is the real responsible
head of the Treasury. It is his function to regulate the pubUc
income and expenditure, to propose any change of taxation
or any measures affecting the public debt, to keep the pubhc
services in funds and to supervise the currency and the
banking legislation of the country. He is ex o-fficio Master
of the Mint. He is assisted on the administrative side by the
Financial Secretary. The Financial Secretary attends to
the details of financial business and in particular to the
sanction of estimates and to seeing them through the House
of Commons. The Financial Secretary also represents in the
House of Commons a number of departments which have no
ministerial head. Both the Patronage Secretary and the
Financial Secretary leave office whenever a change of
administration takes place.

The foregoing are political officers with seats in Parliament.
At the head of the permanent staff of the Treasury there is
a Permanent Secretary, and under him are three Controllers,
with the status of heads of departments. Each, subject to
the general supervision of the Permanent Secretary, is directly
responsible to the Board (that is to say, in practice, to the
Chancellor of the Exchequer) for one of the main departments

THE MODERN FISCAL SYSTEM 137

of the work of the Treasury, namely Finance, Supply Services,
and Establishment. By Supply Services is meant voted
Expenditure, while Estabhshments include all questions of
personnel, salaries, wages, the staffing of public departments,
pensions, and kindred matters. Each of the three depart-
ments is organized in several divisions, with an Assistant
Secretary at the head of each, with three or four subordinates.

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
seventy-four charges, involving seventy-four 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 1816 in reference to revenues
and expenditures of Ireland and the two consolidated funds
were further consolidated into one consolidated fund for
Great Britain and Ireland. The Consolidated Fund stands
to the credit of the Exchequer.

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

138 ENGLISH PUBLIC FINANCE

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
central authorities.

Each of the head offices concerned with the administration
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
neighbourhood 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 eight ^ 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 honoured 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.

^ In the provinces.

THE MODERN FISCAL SYSTEM 139

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 Pajrmaster 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
" 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
accounting 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 abohshed
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

140 ENGLISH PUBLIC FINANCE

as he has a suf&cient 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, provided that the aggregate of the vote for the year
is not exceeded. 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.
Theoretically 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
accounts 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
department.

There is a complete and thorough system of audit.

THE MODERN FISCAL SYSTEM 141

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
year which terminates on 31st March, and are laid before
Parliament on or before 30th June 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 Britain, made in 1917 to the Institute for
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. We are also indebted to English friends for valued
information in regard to recent changes in procedure.

The word " vote " which frequently occurs in the chapter is used in
a sense equivalent to our term " appropriation," while the word
" issue " is equivalent in our usage to " pay."

CHAPTER XXV

CONCLUDING THOUGHT AND DEDUCTIONS

We have now traced the history of English pubHc
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 collecting
the taxes.

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,

142

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144 ENGLISH PUBLIC FINANCE

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 notwith-
standing the heavy financial burdens of the war there has been
during the war period an increasing expenditure for education,
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.
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
manufacture, most of which she must seek without her own
borders.

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r.xi

146 ENGLISH PUBLIC FINANCE

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 labour and for capital, there need be no fear
but that England will maintain a strong and wholesome
national 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 143 and 145 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.

The Bank of England

CHAPTER I

A BANKING EVOLUTION

The Bank of England is more than a corporation. It is 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
several 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 honourable and capable administration of the finances of
the world's greatest money capital.

The Functions of the Bank

The Bank of England while privately owned performs all
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,
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 Exchequer
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

147

148 ENGLISH PUBLIC FINANCE

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, 1918,
was estimated by the " Committee on Ciirrency and Foreign
Exchanges after the War," of which Lord Cunliffe was
Chairman, at £40 million. The Scotch and Irish banks, as
explained 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
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 1st August, 1914. The raising of the Bank's
rate usually would automatically turn the exchanges in favour
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 structure 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.

A BANKING EVOLUTION 149

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.

CHAPTER II

THE GENESIS OF BANKING

It 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 secmity. From such advances against the revenues
it was an easy step to making direct loans. Sometimes 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 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
repayment.

150

THE GENESIS OF BANKING 151

The necessities for ready money by those taking part in
the crusades gave the ItaHans special opportunities for
making 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
centiiry to well into the fourteenth century — were active
patrons 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
contract, 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."

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, 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 England, 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 favouring, that your waiting shall not seem burdensome to
you. Witness my hand at Rothomagum, the 25th day of August.

(1199 A.D.)

152 ENGLISH PUBLIC FINANCE

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 silver, 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 aforenamed 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 borrowed 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
bankrupt.

The King's 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 honourable position
at court. He was charged with the arduous duty of keeping
the king's coffers 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
from 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 as
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

THE GENESIS OF BANKING 153

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 sufficiently satisfactory to
cause them and their successors to be wdling to continue
financial relations over two centuries — relations which were
to continue for yet other centuries.

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
deposit were issued and used " hke coin." So these early
banks were banks of issue as weU 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,
weakened confidence in the private bankers and led to the
establishment 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
directions.

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

154 ENGLISH PUBLIC FINANCE

della Piazza del Rialto. The Banco del Giro, or, as it came to
be known, the Bank of Venice, continued in business until
1806.

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 Andr6ades 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 genesis
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
making 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
character to modern bank notes. They were certificates of
deposit, 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 banks, it continued in business until
1790, when its affairs were liquidated by the city, which
guaranteed its solvency. The Bank of Amsterdam theo-
retically held in trust the actual coin or bullion deposited with
it, issuing its notes against such deposits. At a time when the
coinages were systematically sweated and clipped the function

THE GENESIS OF BANKING 155

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
precipitated by the disclosure that its assets had been
clandestinely loaned to the Dutch East India Company.
To return to England.

The English Goldsmith Bankers

Those who first engaged in business operations in England
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
capacity the goldsmith also conducted a pawn-brokerage
business. 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 traveller 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
balances to the goldsmiths. Before that, for some time, they
had been in the habit of depositing them for safe keeping in
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 particular
deposit.

They then got into the habit of entrusting their surpluses

156 ENGLISH PUBLIC FINANCE

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
employers. The latter then awoke to the fact that by such an
arrangement their funds could be safe-guarded 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 Cromwcllian 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
mercantile 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
Exchequer," already noted in a previous chapter, involved
the large sum of £1,328,526 and, as might be expected, was
followed by serious consequences to the goldsmiths and to the
entire community.

CHAPTER III

THE pARLY HISTORY OF THE BANK OF ENGLAND

Thus it was when, about twenty years after the happening
of the events just described, WiUiam 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 £1 million 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
corporation to be called " The Governor and Company of the
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 the methods of banking then known. Its capital

157

158 ENGLISH PUBLIC FINANCE

of £1,200,000 was loaned wholly to the State for an annual
return of £100,000 — that is, for " an interest " of 8 per cent,
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
becoming 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
felt. The Exchequer officials no longer had to make
" frequent processions to the city to borrow money on the best
and nearest public seciirities, at 10 or 12 per cent, per annum
interest," while the mercantile community had a source
from which to obtain loans at reasonable rates. 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 afterwards abandoned.

EARLY HISTORY OF THE BANK OF ENGLAND 159

To-day 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
business it desired to build up its deposits and increase its
note issues by attracting money from the goldsmiths ; there-
fore the payment of interest was a powerfiil 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
restoration 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 to-day
the Bank has the exclusive right of note issue in England,
except for the unimportant exception noted on page 167, the
management of the debt and the Government deposit accounts.
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. ^ The notable services rendered

1 Paxt 1, Chapter V., and Chapter VI. •

160 ENGLISH PUBLIC FINANCE

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
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 latter part of
the eighteenth century, due to the invention of labour saving
devices and the discovery of new processes of manufacture,
led to a concentration of population, to great activity in manu-
factures 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 country and city
were thus 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

In 1793 when England was drawn into the maelstrom of
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 million. It had notes
outstanding for £11,600,000. Its specie reserve was about
£5 million. 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
expected that England would be involved. Pitt and his
Government had made all their plans for a long period of
peace in which to recover fully 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
conditions were bad, due to a succession of bad harvests and
the culmination of a period of over-trading. 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 necessary to authorize a special issue of Exchequer bills to
be loaned to merchants.

It was in the midst of such financial conditions that Pitt
was forced to find the means with )^hich 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,

161

11— (1823)

162 ENGLISH PUBLIC FINANCE

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 totalled just under £10 million sterhng. To meet the
demands upon it the Bank increased its note issues. Mean-
while its cash resources were runnmg down in an alarming way.
After increasing to about £1 million in 1794, they fell to
£6 million in February, 1795, to £5 million in August, to an
average of a little over £2 million in 1796 and finally to
£1,086,000 in February, 1797.

Specie Payments Suspended 1 797-1 821

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
Council which authorized the suspension. A meeting of
bankers and merchants passed a resolution agreeing to accept the
notes of the Bank for payments due to them. This resolution
was supported by some four thousand signatures. The matter
was referred to Parliament for action. An examination hy a
parliamentary committee disclosed the fact that in addition
to the permanent debt of £11,700,000 represented by its
capital, the Bank had loaned the State over £10 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

• THE BANK AND THE GREAT FRENCH WAR 163

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 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 his influence in favour 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 1817, the issues of notes were steadily 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 endeavoured to bring
England to her knees by closing to her all the Continental
ports and markets. While such closing was only partial, as
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
facilities were further accentuated by the large amounts of
Exchequer bills put out by the Government, plus the con-
siderable sum of inland bills of exchange which was in use and
the country banks' bills which were in circulation.

Effects of the Suspension

Advancing prices of commodities, including gold, and
adverse foreign exchanges were the barometers which measured

1 Year.

Year

1810

. 13

1816

1811

1812

. 20

1818.

1813

. 22

1819

1814

. 25

1820

1815

. 16

164 ENGLISH PUBLIC FINANCE

the inflation produced by the large issues of bank and
Government paper. According to Toake, after being at a
discount of £8 7s. per £100 in 1801 and £1 5s. in 1802, Bank
Notes were almost at par (average £2 13s. discount) from 1803
to 1809. The depreciation then became marked, averaging
as follows, until the resumption of specie payments in 1821 —

2 13

4 9
2 12

^ Years ending 1st Februarj'.

Silberling, by another basis of computation, arrived at the
conclusion that the premium on gold in 1811 averaged nearly
22 per cent., in 1812 over 32 per cent., in 1813 over 40 per
cent. The Hamburg exchanges averaged 18 per cent, from
normal in 1810, nearly 31 per cent, in 1811, over 24 per cent,
in 1812, and over 26 per cent, in 1813. Commodity prices
advanced until about 1814, 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 " Bullion
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
increase 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

THE BANK AND THE GREAT FRENCH WAR 165

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.

Resumption of Specie Payments in 1821

These conditions referred to were so serious that on 3rd
February, 1819, the two Houses of Parliament each appointed
a committee to inquire into the position of the Bank. These
committees, after hearing the views of bankers, publicists
and others, recommended a gradual resumption of specie
payments. In piusuance of their recommendations an Act
was passed unanimously in 1819 providing for the resumption
of specie payments on 1st May, 1823. This date was antici-
pated by two years, the metallic basis again becoming effective
1st May, 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
Company of the Bank of England, it shall not be lawful for any
body politic or corporate whatsoever ... or for any 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 failure
precipitated or accentuated commercial crises for more than a
century and whose note issues increased the redundancy
of the currency during the period of the suspension of specie
payments.

By an Act passed in 1826 Corporate Banks of Issue were

166

THE JOINT- STOCK BANKS 167

permitted if located more than 65 miles from London. This
continued to be the law mitil 1844 when Parliament deprived
both private 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 1833 Parliament affirmed the legality of joint -stock
banks which issued cheques. The Bank of England had
vainly endeavoured to prevent the passage of such legislation.
Steps were at once taken by James W. Gilbart and associates
to organize " The London and Westminster 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 2 per cent, per annum was
offered on sums ranging from £10 to £1,000 received on
" permanent 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
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 resources of these banks, other than the Bank of
England. It is of interest to note that the London and
Westminster by amalgamation with the London and County
in 1908 became The London County and Westminster Bank
which absorbed Parr's Bank in 1918, when the name was

168

ENGLISH PUBLIC FINANCE

changed to The London County Westminster and Parr's Bank,
which according to a recent report had 147 offices in London
alone and 630 in the Provinces, besides several foreign offices.
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 neighbourhood 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 31st
December, 1919, the total resources of the joint-stock banks
of England and Wales were about ;£2,300 million. Of these
vast resources, £1,742 million — say, 76 per cent. — were held
by five great banks. In alphabetic sequence, these banks,
their liabilities and equivalent resources on 31st December,
1919, were as follows —

THE "BIG FIVE" JOINT-STOCK BANKS.
In Millions Sterling.

Capital

Accept-
ances and

Deposits
(including

Total

Name.

and

Endorse-

Undivided

Liabilities.

Reserves.

ments.

Profits,
etc.).

Barclays

15,8

13.6

296,1

325,5

Lloyds

19,1

32,1

325,9

377,1

London County, West-

minster and Parr's .

17,3

23,7

305,8

346,8

London Joint City and

Midland

16,8

29,0

373,0

418,8

National Provincial and

Union

15,0

6,0

252,4

273,4

84,0

104,4

1553,2

1741,6

CHAPTER VI

THE BANK CHARTER ACT OF 1844

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
liability 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 £3
million. This added to the strength of the Bank and made
it possible to equalize dividends which theretofore had
fluctuated greatly. In 1751 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
Western and Law Courts Branches, London. The notes
of the Bank were made 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
discontinued publishing the amount of discounted bills which
it 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

169

170 ENGLISH PUBLIC FINANCE

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 hme-
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 17th May, 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, led English bankers and economists of the time
to make exhaustive 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 exchanges. 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 necessary, in order to meet the emer-
gency, to resort to special measures, the most important of

THE BANK CHARTER ACT OF 1844 171

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 difl&cult 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
definite 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
suspend 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 cmrency, 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
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 31st August, 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 million,
of which the perpetual Government debt of £11 million was
to form a part, were to be transferred to the issue department ;
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

172 ENGLISH PUBLIC FINANCE

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 already
having such rights, as they lapsed, were to the extent of
two-thirds thereof to revert to the Bank. Thus it is that
to-day the Bank has a right of issue against securities of
£4,450,000 in excess of the original £14 million.

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. 9d.
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.

This division of the functions of the Bank into two depart-
ments has been severely criticized as arbitrary and unscientific.

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 Treasmy
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

THE BANK CHARTER ACT OF 1844 173

and of the Continental state banks, notes are created and
issued on the security of discounted bills and on the specie
reserve. 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.
This can be accomplished only by a transfer of gold from the
Banking Department, in which department as a rule only a
small amount of gold is held, or by obtaining gold from the
Joint Stock Banks or by buying new gold in the market.
Whatever method is used, except the purchasing of new gold,
reduces the amount of gold in circulation or reduces the reserve
upon which the credit or deposit currency of the country is
based, and this has the effect of diminishing the credit facilities
at the service of the business 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 favour of a system based upon
banking experience gained since that time.

CHAPTER VII

THE GOVERNMENT OF THE BANK

The 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 wiU 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.

The 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
always re-elected after a year. This has been the unbroken
practice for many years. When a vacancy occurs by death
or 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 honour is made with great Care for a
reason which will now be stated.

The Governor and Deputy Governor

The ofhccs 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 office becomes Deputy Governor. Occasionally, for
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

174

THE GOVERNMENT OF THE BANK 175

arrives, as it is called, " at the Chair." Because it is impor-
tant that the men who fill the offices of Governor and Deputy
Governor should still be in the vigour 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 over-ambitious 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 affairs 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
exercises. They appear to be of a general supervisory nature
and in particular to control the relations and negotiations
between the Bank and the Government.

The Officers

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 Comt of Directors
or the Committee of Treasury. In a word, to do very much
the sam^e 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
departments were created. WTiile these men have high

176 ENGLISH PUBLIC FINANCE

standing in the Bank and much authority in their respec-
tive departments, 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
until recently trained bankers should have been excluded
from the Board of Directors of the Bank which up to the
present time has been admittedly, in a sense, the reserve
Bank for the world's commerce.

The 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 one-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
Inspection for the Cashier's Office and a Committee of Inspec-
tion for the Accountants' Office. In addition to these
committees special committees are from time to time appointed
as occasion may require.

The Committee of Daily Waiting consists of three Directors
in rotation from the whole body. Their attendance is at
11.30 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
submitted 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

THE GOVERNMENT OF THE BANK 177

required by the cashiers for daily wants. The duties of the
other committees arc 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," which is under the immediate supervision of the Chief
Cashier, comprises the transaction of all business where actual
cash is concerned, together with the necessary book-keeping
which it involves. The latter division, under charge of the
Chief Accountant, takes cognizance of all matters of pure
book-keeping 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 Ofhcer. 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.

The Bank Building

The building of the Bank of England is located in the
heart of what is known as " the City," the corporate centre
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. Near by 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 near by. The head offices of the
joint -stock banks and of the great private banking houses are
not far away.

12— (1823)

178 ENGLISH PUBLIC FINANCE

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 salmon colour 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 remembered,
the Bank was founded.

CHAPTER VIII

THE SCOTCH AND IRISH BANKS

In 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 only bank in Scotland until
the year 1727. At the date of the latest available reports
(December, 1918) 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 31st
December, 1919, amounted to £28,705,345, comparing with
£7,744,000 on 31st December, 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 1918 there were nine Joint-Stock Banks in Ireland with 848
branches and combined resources of £175,739,000. The out-
standing note issues on 31st December, 1919, were £30,532,435,
comparing with £8,074,000 on 31st December, 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 fiduciar}^ 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
uncovered issues fixed at an aggregate of £6,354,494. There
has been no change in this authorization.

179

180 ENGLISH PUBLIC FINANCE

The Scotch and Irish Banks may increase their circulation
to any extent in accordance with the pubhc 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
6th August, 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, 1919, the legal
tender status was withdrawn from Scotch and Irish Bank Notes
to take effect from 1st January, 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.

Tabl

NATIONAL DEBT.
United Kingdom — Great Britain and Ireland.

Approximate Amount — 31st March, 1920.

For further details see numbered descriptive notes following table.
000 omitted.

Title of Loan.

Interest
Rate. Payable

Redeemable
or Payable.

Out-
standing.

Funded Debt —

(1) ConsoUdated Stock

(2) Annuities

(3) Annuities

2i 5 Ja., Ap., Jy.
2i 5Ja.,Ap., Jy.
2i 5Ja.,Ap.,Jy.,

Oct
Oct.
Oct.

After 5 April, 1923
After 5 Jan., 1905
After 5 Jan.. 1905

i
277,200
2,600
21,500

(4) Debt to Bank of

England

(5) Debt to Bank of

Ireland

2t
2}

Total Consols

Perpetual

301,300

11,000

2,600

(6) Total Funded Debt .

(7) Terminable Annuities

— Estimated Capital
Value .

(8) Unfunded Debt

(9) Ways and Means

Advances

(10) War Loan

(11) War Loan

12) War Loan

(13) War Loan
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 Scries

(17) Fourth Series .
Fourth Series .
Fourth Series .

(18) Funding Loan .

(19) Victory Bonds

(20) Exchequer Bonds
Exch quer Bonds
Exchequer Bonds
Exchequer Bonds

Exchequer Bonds

1 Mar. and Sept.

1 June and Dec.

15 April and Oct.

1 April and Oct.
1 April and Oct.
1 April and Oct.
1 April and Oct.
1 April and Oct.
1 April and Oct.
1 April and Oct.
1 April and Oct.
1 Mar. and Sept.
1 Mar. and Sept.
1 Mar and Sept.
1 Mar. and Sept.
1 Feb. and Aug.
1 Feb. and Aug.
1 Feb. and Aug.

4 1 May <"nd Nov.

4 1 Mar. and Sept.
3 28 Jan. and July

5 1 June and Dec.
5 5 .\pril and Oct.
5 1 April and Oct.

5i 1 Feb. and Aug.

1925 >
1 Mar., 1928 5

< After 1 Mar,
(On

( After 1 Dec, 1925

(On 1 Dec, 1945

< After 1 June. 1929 )

< On 1 June, 1947 \

. After 15 Oct.,
' On 15 Oct.,

1929 :
1942

On
On
On
On
On
On
On
On
On
On
On
On
On
On
On

1 Oct., 1922 V
1 Oct., 1924
1 Oct., 1927
1 Oct., 1927
1 Apr., 1923
1 Apr., 1925
1 Apr. 1928
1 Apr., 1928
1 Sept, 1923
1 Sept., 1925

1 Sept.,
1 Sept.
1 Feb.,
1 Feb.,
1 Feb..

1928
1928
1924
1929
1929'

< After 1 May, 1960 )
( On 1 May, 1990 )
After 1 Sept., 1920
On 28 Jan., 1930 \
On 16 Dec, 1920 |
On S Oct., 1921 '
After 1 Oct., 1919 f
O < 1 Apr., 1922
^" I 1 Feb.. 1925 '
But see note (20).

Carried forward

314,900

19,300

204,900
62,700

12,800

1,977,100

64,100

1,475,800

408,900
359,500

319,100

5219,100

*■ Total correct — items approximate

181

182

ENGLISH PUBLIC FINANCE

NATIONAL DEBT— Conlinued.

United Kingdom — Great Britain and Ireland.

Approximate Amount — 31st March, 1920.

For further details see numbered descriptive notes following table.
000 omitted.

Title of Loan.
Brought forward

Interest
Rate. Payable.

Redeemable
or Payable.

(21) Treasury Bills

(22) War Savings Certifi-

cates .

(23) Other Capital

Liabilities
External Debt —

(24) To United States

Govt. 84,212,835,993

(25) Anglo-French Loan

$500,000,000 half
taken into account 5

(26) Five Year Secured

Notes, $134,458,000 5i

(27) Three Year Conv.

Notes, $101,600,000 5J
28) Ten Year Conv. Bonds

$148,400,000 . 5|

(29) Twenty Year Gold

Bonds, $143,587,000 5J

(30) Other Debt Created

under War Loan
Acts .

Total External Debt

Grand Total Direct Debt

(31) Guaranteed Loans —
Guaranteed Stock

(created under Irish

Out-
standing.

£5,219,100

1,107,300

273,500

46,900

865,600

5 April and Oct.

15 Oct.,

1920

51,400

1 May and Nov.

1 Nov.,

, 1921

26,500

1 Feb. and Aug.

1 Nov.

,1922

20,900

1 Feb. and Aug.

1 Aug.,

, 1929

30,500

1 Feb. and Aug.

1 Feb.,

1937

29,500
154,300

£1,178,700

£7,825,500

Land Act, 1903) .

2i%

Jan. and July

After 1 Nov., 1933

57,043

Guaranteed Stock

(created under Irish

Land Acts, 1903

and 1909) .

Jan. and July

After 3 Dec, 1939

50,C40

Local Loans Stock .

5 Ja., Ap., Jy., Oct. After Apr., 1912

77,059

Met. Police Deb.

Stock .

Jan. and July

On 1 July, 1920

450

Egyptian Government

Guaranteed Loan .

Mar. and Sept.

At any time.

6,098

Greek Guar. Gold

Loan of '98 .

April and Oct.

Redeemable at par
by annual drawings

4,234

Mauritius Stock, 1914

Guar, by Imp. Gov.

1 Jan. and July

On 1 Jan., 1940

600

Soudan Govt. Gtd.

Bonds .

1 May and Nov.

3.500

Transvaal Govt. Gtd.
Stock .

1 May and Nov. |

After 1 May, 1923 >
On 1 May, 1953 ]

35,000

Transvaal Govt. Gtd.

Stock .

3 •

1 Jan. and July

On 1 July, 1958

5,000

Turkish Guaranteed

Loan .

1 Feb. and Aug.

1855

3,815

Total Guaranteed Debt

243,439

Grand Total Direct and Guaranteed Debt

£8,069,000

NATIONAL DEBT 183

DESCRIPTIVE NOTES.

'* Stock " = Registered Bonds : See Item 32.
Transfers, Denominations, etc. : See Item p. 186.

(1) 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 24th June, 1752.
This was the origin of the 3% Consolidated annuities, known in the market from that time
as " Consols." The present issue of 2J% " Consols " was created under the terms of the
National Etebt (Conversion) Act of 1888. Up to 5th April, 1889, interest was at the rate of
3% per annum, and for the 14 years ending with 5th April, 1903, it was at the rate of 2 j%.
Since that date the rate has been 2i%. Redeemable at par on or after 5th April, 1923, in
such order or manner as Parliament may direct. See also p. 105.

(2) 2J% Annuities created under the National Debt Conversion of Stock Act, 1884.

(3) 2J% Annuities created in 1853 for the purpose of redeeming South Sea stock and
certain old 3% annuities.

(4) Debt to the Bank of England. — Perpetual loans made in consideration of franchise
as follows —

Original Capital. £ £

1694— Act 5 and 6 W. and M. c. 20 1,200,000

1708— Act 7 Anne, c. 7 400,000

1742— Act 15 G. 2, c. 13 1,600,000

3,200,000

Capital purchased of the South Sea Co.
1721— Act 8 G. 1. c 21 (residue of capital of £4,000,000

purchased of the South Sea Company) . . . 3,328,300

Other Advances to Government —
1716— Act G. 1 c. 8, Balance of £2,000,000 of Exchequer Bills

cancelled 500,000

1717 — 1 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 franchise
as follows —

£ s. d.

1782— Act 21 and 22 G. 3 c. 16 (Irish) (Irish Currency, £600,000) . 553,846 3 1

1797— Act 37 G. 3 c. 50 (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 1

1821— Act 2 G. 3, 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 included in the permanent or fixed annual charge. See
also page 82.

(7) Terminable Annuities. — These annuities were created under different acts dating
from the time of George IV.

(8) Unfunded Debt. — All debt, except the Funded Debt and the Terminable Annuities,
is technically known as Unfimded Debt.

(9) Ways and Means Advances. — ^These are book advances made by the Bank of
England for short terms. See text, page 36.

(10) 3i% 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) 4i% War Loan.— Original issue, £900,857,691. Issued 21st June to 10th July,
1915, partly for cash at par and partly (say, £289,797,921) in exchange for " Consols " and
3}% war loan. The greater part of this issue has been exchanged for subsequent war issues.
Inscribed 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 11th Jan. to 16th Feb.,
1917, at 95 for cash and on certain terms in exchange for other previous issues. Receivable
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

184 ENGLISH PUBLIC FINANCE

stock or bonds is not ordinarily a resident of the United Kingdom. Inscribed stock ; or
bonds to bearer in denominations of £50, £100, £200, £500, £1,000 and £5,000. Interchange-
able.

(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. Interchangeable.

Etepreciation 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 Commis-
sioners. 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. Oflered at
par 1st Oct., 1917, to 31st March, 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 the 4% Bonds exempt from British income
tax other than super tax. Received in payment of death duties, excess profits duty or
munitions exchequer payments, if held for six months prior to the date of presentation.

Convertible : 5% Bonds into 5% War Loan, 1929-47 (12) at the rate of £100 5% War
Loan for each £95 nominal value 5% National War Bonds surrendered ; 4% Bonds into
4% War Loan 1929-42 (13) at the rate of £110 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 1st April, 1918, to 30th Sept., 1918. Total sales about
£493 million. Terms same as first series. Payable : 5% Bonds due in 1923 at 102 ; in
1925, at 103 ; in 1928, at 105. 4% Bonds payable at par.

(16) Third Series.— ToUl sales about £500 million. Offered 30th Sept., 1918, to 18th
Jan., 1919; 5% bonds at par and 4% bonds at £101 IDs. Payable: 5% bonds due 1st
Sept., 1923, at 102, 1st Sept., 1925, at 103, 1st Sept., 1928, at 105 ; 4% bonds due 1st Sept.,
1928, at 100. Other terms and conditions, same as first stries.

(17) Fourth Series.— Total sales about £80 million. Offered 31st Jan., 1919, to 31st
May, 1919; 5% bonds at par; 4% bonds at £101 10s. Payable: 5% bonds 1st Feb.,
1924, at 102, 1st Feb., 1929, at 105 ; 4% bonds 1st Feb., 1929, at 100. Terms 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 12th June
to 12th July, 1919. A sum equal to 2^% on the nominal amount of the loan originally
created is set aside semi-annually and any balance remaining 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 death duties if held by the deceased for "ix
months prior to death. Exempt from taxation in the hands of persons neither domiciled
nor ordinarily resident in the United Kingdom. The interest (dividends) on Iwnds held by
persons not ordinarily resident in the United Kingdom will be paid free of tax without regard
to domicile 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 85 12th June to
12th July, 1919. A sum equal to 2i% of the nominal amount of bonds originally created
is set aside every half year, and after payment of interest the balance of the fund is applied
to the redemption of bonds at par by lot on 1st Sept., 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 Coupons attached
to bonds.

(20) ExciiEoUER 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 193. The bonds of all issues are p lyable to bearer and are in denomina-
tions of £50, £100, £200, £500, £1,000 and £5,000 except there are no £200 bonds in the 3%
issue of 28th Jan., 1920. The Exchequer Bonds may be registered either as inscribed stock
or registered certificate. The 5% issue of 1920 andthe5's of 1922 are receivable in payment
of death duties, the 5's of 1922 will also be received in payment of excess profit duties and
munitions exchequer payments on the same conditions as those attached to the National
War Bonds. The holders of 5J% issue due 1925 may give notice during the month of Jan.

NATIONAL DEBT 185

in any of the years 1921, 1922 or 1923, requiring repayment of the bonds at par on the
1st of Feb. in the year next succeeding that in which such notice is given. Under no circum-
stances may notice once given be subsequently withdrawn. Tax provisions all issues, except
the last, concerning which there appears to be no exemption, same as item (18).

(21) Treasury Bills. — On 14th April, 1915, a scheme was put into operation under
which the Bank of England was prepared to receive applications daily for Treasury bills
to mature at various dates up to twelve months after date of issue, but the sale of such
bills was suspended on 3rd Jan., 1917. On 30th March, 1917, the sale of bills by tender
was resumed, but the last issue under this system was made on I5th June, 1917, and was
repaid 15th June, 1918, while on 18th June, 1917, the method of daily sales at fixed rates
was reverted to, and was continued until 30th May, 1919, when sales were suspended for some
weeks. On 15th July, 1919, bills were again placed on sale and are now (May, 1920) issued
with a currency of three months. See also pages 75 and 193 and Index.

(22) War Savings Certificates. — The issue of these Certificates was commenced Feb.,
1916, at the rate of 15s. 6d. for every £1 certificate, repayable at par free of income tax in 5
years from dates of issue. See also page 21.

(23) Other Capital Liabilities. — These comprise sundry liabilities under the Telegraph
and Telephone Acts, Public Works Acts, Mi'itary Works Acts, and several similar acts.

(24) Debt to the United States Government. — 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 20th Nov., 1919, states that the total advances
of the British Government to 15th Nov., 1920 aggregated $4,277,000,000. A letter of
the Secretary of the Treasury to the Senate dated 13th March, 1920, indicates repayments
of $64,164,000. The accrued unpaid interest to 10th March was reported to be $21 1,828,890.

(25) Anglo-French Loan. — This loan for $500,000,000 offered in New York, 14th Oct.,
1915, at 98. It is a joint and several obligation of the Governments of the United Kingdom
of Great Britain and Ireland, and the French Republic. Principal and interest are payable
in New York City, in United States gold coin without deduction for any present or future
British or French taxes. Coupon Bonds in denominations of $100, $500 and $1,000 may
be registered as to principal Registered Bonds in denominations of $1,000, $10 000 and
$50,000 and authorized multiples. Coupon and registered bonds interchangeable. Con-
vertible at the option of the holder on any date not later than 15th April, 1920, or (provided
that notice be given not later than 15th Apni, 1920) at maturity par for pai into 14-25 year
joint and several 4i% bonds of the Governments of the United Kingdom of Great Britain
and Ireland and the French Republic. Such 4^% bonds will be payab'e principal and
intere-t n United States gold coin in New York City free from deduction for any present
or future British or French taxes. They will mature 15th Oct., 1940, but will be re-
deemable at par and accrued interest in whole or in part on any interest date not earlier
than 15th Oct., 1930, upon 3 months notice.

(26) Secured Dollar Notes. — Part of an original issue of $150,000,000 made in New York,
1st Nov., 1916, principal and interest payable in New Yorkin United State-gold coinoratthe
option of the holder in London in sterling at the fixed rate of $4865 to the pound. Free
of any British taxes present or future. Redeemab'e on 30 days notice from 1st Nov., 1919,
to 31st Oct., 1920, at 102, and interest, and from 1st Nov., 1920 to 31st Oct., 1921, at 101
and interest. Secured by pi dge with the Guaranty Trust Company of New York of securities
approved by Messrs. J. P. Morgan & Co. having a market value of 20% over the par value
of the notes 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.

(27) 3-Year Convertible Notes. — Issued in New York, 23rd Oct., 1919, at 98 and
interest. Offered in conjunction with 10-year convertible bends (28) $250,000 000 in aU.
Denominations $100, $500, and $1,000. Interest and principal payable in New York in
United States gold coin, without deduction for any British taxes present or future. Con-
vertible at the option of the holder at par and interest into National War 5% Bonds fourth
series (17), sterling exchange being computed for the purpose of conversion at the fixed
rate of $4'30 to the pound. Conversion may be made at any time pr' to 21st Nov., 1922,
notice to be given prior to 1st Sept. 1922, of intention to convert. The converting note
holder wi" be entitled to receive £232 12s. principal amount of such National War Bonds
for $1,000 of principal amount notes surrendered.

(28) 10- Year Convertible Gold Bonds —Offered in New York with (27) 23rd Oct.,
at 96i and interest. Principal and interest payable in New York 'n United States gold
coin, free of any British taxes present or future. Coupon bonds in denominations of $100,
$500, $1,000, registered as to principal. Convertible at any time prior to 1st Feb., 1929.
For terms and conditions see above. No. 26.

(29) 20- Year Gold Bonds. — Issued 1st Feb., 1919, in exchange for 2-year secured notes
of the United K ngdom 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 $4,865, free of British
taxes, present or future. Denominations, coupon bonds, $100, $500 and $1,000, principal

186 ENGLISH PUBLIC FINANCE

registerable. Registered bonds $1,000, $5,000 and $10,000, coupon and registered bonds
interchangeable.

(30) Other Debt Created Ukder War Loan Act. — " Other debt is taken to include
all borrowings outside this country, with the exception of the first American Loan raised
in Nov., 1916, under the American Loan Act." (The Anglo-French 5's) (Economist, 3rd April,
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 approximately £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) 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 Purchase Bonds are secured by the Irish
Land Purchase Funds.

TRANSFER REGULATIONS.

(32) 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 boolcs
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
(oi on the books of the Bank, in which case the owner has no documentary evidence of
ownership (such stock is known as inscribed stock) or (6) 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 Coupon Bonds are obtainable in exchange for mscribcd stock or stock
transferred by deed, in the case of most issues. Registered Coupon Bonds are issued in the
same denominations as Bearer Bonds. A Certificate of ownership similar to (h) above is
issued to which Coupons for interest are attached. Each Registered Coupon Bond is
transferable by deed but only in its entire amount.

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.

Sinking Funds. — Old Sinking Fund (38 and 39 Vict.) consisting of the surplus, if any,
of income over expenditure for any year 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. Ihe
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
ofi advances made by the Bank of England 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 ways and means.

New Sinking Fund (38 and 39 Vict.) consisting of such portion of the permanent annual
charge for the National Debt as 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 Commis-
sioners 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 terminable) 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 £15,547 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 conver-
sion of 3% Stock into 2} and 21% Stock, and expiring in 1934.

Application of Sinking Funds. — The Finance Act, 1915, makes Sections 3 and 4 of the
Sinking Fund Act, 1875 (which relate to the application of the Old and New Sinking Funds),

NATIONAL DEBT 187

applicable to any securities issued under the War Loan Act, 19M, or any Act extending
or amending that Act or any other enactment autboriring 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 foUowinR
regulations have been made by the Treasury respecting the Depreciation Fund for 4% and
5% War Loan. Under Section 32 of the Finance Act, 1917 : (1) 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 Treasury : (a) In respect of the six months from 17th Feb., 1917, to
16th August, 1917, an amount equal to six-eighths of 1% of the total nominal value of the
Stock and Bonds of the 4% War Loan, 1929-1942, and the 5% War Loan, 1929-1947,
originally created ; (6) in respect of each succeeding month an amount equal to one-eighth
of 1% of the total nominal value of the said Stock and Bonds ; provided that no payTnent
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 Depreci-
ation Fund shall be applied from time to time by the National Debt Commissioners in the
purchase of Stock or Bonds of 4% War Loan, 1929-1942, or 5% 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 Depreci-
ation Fund shall be cancelled in the same manner as Stock or Bonds bought for the Old
and New Sinking Funds. (5) The 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% War Loan, 1929-1942, or the 5% War Loan, 1929-1947, purchased out of funds
standing to the credit of any Government Account between the 17th Feb., 1917, and the
passing of the Finance Act, 1917, in anticipation of the establishment of the Depreciation
Fund. (6) Any sums tanding to the credit of the fund, and not required for the immediate
purchase of such Stock or Bonds as aforesaid, may be invested by the National Debt Commis-
sioners in Treasury Bills, or in advances to the Treasury oi sums which the Treasury may
borrow for the purpose of raising any sum which they arc 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 Depreciation Fund 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 2i% 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 Fimd 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 1st May,
1990, but His Majesty's Government reserve to themselves the right, on giving three calendar
months notice in the London Gatette, to redeem at par at any time on or after 1st May, any
outstanding 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 detemined
by lot and paid off on 1st Sept. in such year in accordance with regulations made by the
Treasury. The numbers of the Bonds drawn for redemption on each occasion will be adver-
tised in the London Ga-.ette 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 becom*
repayable. The first drawing will be that for the Bonds to be redeemed on 1st Sept., 1920.

AUTHORITIES.

The sources from which the above tables and notes have been compiled are Finance
Accounts for 1919-20, the Stock Exchange (London) Daily Official List, official circulars so far
as obtainable, the Stock Exchange Official Intelligence, Vol. 38 — for 1920, The Economist,
and The Bankers Magasine (London).

188

ENGLISH PUBLIC FINANCE

QUOTATIONS.

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 (A) Yield.

Price.

High.

Month.

Low.

Month.

Price.

High.

Low.

1697

(a) 97

(e) 88.0

5.7

(i) 98

514

1701

(a) 79

(«) 68.0

7.3

(/) 123

1034

1714

(?) ^=*

78}

(e) 86.2

5.8

(m) 133}

116i

1739

(6) 105

Jan.

Nov.

(/) 101.9

3.3

(») 144

134

1749

102

Oct.

Feb.

97.6

3.1

140

127

1755

101

Jan.

Oct.

94.5

3.2

131

120

1766

Jan.

Feb.

88.5

3.4

140

134

1775

Jan.

July

89.6

3.3

146

140

1785

Dec.

Feb.

59.7

5.0

130

112

1792

Mar.

Dec.

(g) 90.0

(g) 3.3

216

175

1802

Apr.

Jan.

70.9

4.2

195

180

1817

84i

Dec.

Jan.

75.3

4.0

(o) 294

220

1833

91i

June

84}

Jan.

{h) 87.7

3.4

213i

190

1842

97i

Dec.

88J

Jan.

(t) 92.0

3.3

173

165

1847

93i

Jan.

78}

Oct.

87.2

3.4

206J

180

1854

95J

Sept.

85J

Mar.

U) 9'-9

3.3

221

2044

1857

94i

Jan.

86i

Oct.

91.9

3.3

222

209

1858

981

Oct.

94i

Jan.

96.9

3.1

230

217

1859

971

Dec.

88}

Apr.

95.1

3.1

231

215

1860

95J

Jan.

92}

Oct.

94.0

3.2

235i

225

1861

94i

Nov.

89i

July

91.5

3.3

241

226i

1862

94J

July

914

Jan.

93.0

3,2

(/>) 244

232^

1863

May

Dec.

92.6

3.2

240

232

1864

May

874

Sept.

90.1

3.3

244

234

1865

91i

June

86}

Dec.

89.5

3.3

250

238}

1866

90J

Dec.

84f

May

88.0

3.4

253

240

1867

96i

June

89i

Apr.

93.0

3.2

264

239

1868

96i

May

91}

Jan.

93.9

3.2

251

240

1869

94i

June

91}

May

92.9

3.3

246

235

1870

94 1

May

884

Aug.

92.5

3.3

1871

July

911

Dec.

92.7

3.3

1872

93i

May

914

Dec.

92.5

3.3

1873

May

91}

Dec.

92.5

3.3

1874

931

May

91}

Dec.

92.5

3.3

(r) 261

2494

1875

95}

Nov.

914

Jan.

93.7

3.2

262

251

1876

97i

July

93}

Dec.

95.0

3.2

260

248

1877

97J

Nov.

May

95.4

3.1

267

255

1878

June

93}

Oct.

95.2

3.1

263

249

1879

991

Apr.

944

Jan.

97.5

3.1

271

249

1880

100}

Nov.

97}

Sept.

98.4

3.0

280

269

1881

103

May

98}

Jan.

100.0

3.0

299

278

1882

102i

May

Jan.

100.5

3.0

291

284

1883

102}

Feb.

99}

July

101.4

2.9

.302

288

1884

102}

Apr.

984

Dec.

lOI.O

2.9

312

294

1885

101|

May

9!«

Apr.

99.3

3.0

309

2894

1886

102 J

Nov.

99}

Jan.

100.8

3.0

299

291

1887

103}

May

994

Feb.

101.8

2.9

3084

294

1888

103 J

Mar.

984

Dec.

lOI.O

2.9

332

303

1889

99}

Jan.

96}

Sept.

98.0

2.8

346

320

1890

98}

May

931

Nov.

96.3

2.8

3404

327

1891

97i

Jan.

94}

June

95.7

2.9

343

323

1892

96i

Dec.

93}

Jan.

96.7

2.8

344

325

1893

98}

June

951

Sept.

98.5

2.8

344

327

1894

1021

Dec.

974

Jan.

101.1

2.7

(s) 343

325

1895

108 J

Sept.
July

103}

Jan.

106.2

2.6

3384

322

1896

113}

1054

Jan.

110.7

2.5

336

322

NATIONAL DEBT

189

QVOTATIO'^S— Continued.

Consols and Bank of England Stock,

1697-1919.

For closing years of historical periods and yearly from 1857

Consols.

Bank of E

NGLAND.

Year

Price

Average {k) Yield.

Pric

High.

Month.

Low.

Month.

Price.

High.

Low.

1897

U3i

May

110}

Mar.

112.4

2.4

328

325

1898

1131

Jan.

106}

Oct.

110.9

2.5

351J

326

1899

lllj

Jan.

97}

Dec.

106.9

2.6

(f) 361}

325

1900

103i

June

96}

Dec.

99.6

2.7

349

326

1901

97J

Feb.

July

94.2

2.9

342

320

1902

97J

June

92}

Dec.

94.4

2.9

326}

323}

1903

93 4

Apr.

86}

Apr.

90.7

2.7

331}

311

1904

{d) 91}

June

Mar.

88.2

2.8

316

295}

1905

91|S

Mar.

Jan.

89.8

2,8

308

291}

1906

91J

Apr.

85t"b

Oct.

88.3

2.8

301

268

1907

87 ,^

Feb.

80}

Aug.

84.1

2.9

288}

255

1908

88^

Mar.

83 i"^

Dec.

86.1

2.9

(«) 285

258*

1909

Apr.

82^

Oct.

84.0

3.0

279

256"

1910

83}

Jan.

78}

Dec.

81.0

3.1

272

250

1911

82 ,3,.

Apr.

76}

Sept.

(t) 79.3

3.1

263}

242}

1912

79,^,

Feb.

72i

Oct.

76.1

3.3

251

234

1913

75}"

Mar.

Dec.

73^i

3.4

251

224}

1914

77}',

Feb.

69i

July

741?

3.3

256

234

1915

68}

Jan.

Nov.

65.5

4.1

249}

230

1916

61}

June

53}

Dec.

58.0

4.2

230}

194}

1917

56}

Oct.

Feb.

(e) 54.0

4.6

205

190

1918

63i

Oct.

53J

Mar.

58.2

4.3

226

191}

1919

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 quotations for Govern-
ment annuities. The first quotation is for 1700, the first 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.

(6) (1739-1785) Rogers, J. E. T. History of Agriculture and Prices, Vol. VII, Part II.

\d) (1904-1919) Investors' Monthly Manual.

(e) Average of high and low only.

(/) (1739-1785) Average of daily prices as recorded in Rogers J. E. T., History of
Agriculture and Prices, Vol. VII, Part II.

(g) (1792-1817) Average of the mean of the monthly high and low prices. Silberling,
N. J. in Harvard Review of Economic Statistics, Oct., 1919.

(h) Van Sommers, James. Tables, London, 1848.

(») (1842-1847) (1911-1916) Statistical Abstract for United Kingdom Average monthly
price.

ij) (1854-1910) Average and yield. Williams, T T., Jouma' of Royal Statistical Society
March, 1912.

(ft) 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 5th April, 1889, then 2}%
to 6th April, 1903, and since then 2}%.

(1) (1697-1701) Scott, W. R., Vol. II. See Authorities.

(»i) (1714) Rogers, J. E. T., History of Agriculture and Prices, Vol. VII, Part IL

(n) (1739-1802) Sinclair, Vol. II. See Authorities.

(o) (1817-1861) Francis, John — History of Bank of England — Its Times and Traditions.

ip) (1862-1869) Thorn's Irish Almanac and Official Directory of the United Kingdom
of Great Britain and Ireland.

(f) (1874-1893) (1899-1907) Investors' Monthly Manual.

(s) (1894-1898) Stock Exchange Ol/icial Intelligence.

{I) (19081918) Mathieson's Handbook for Investors, 1919.

(«) (1919) Investors' Monthly Manual.

(u) High and low prices. The months given for the high and low prices of the year are
those in which the price first occurred. In some years these same prices were reached
several times.

190

ENGLISH PUBLIC FINANCE

QUOTATIONS.

LONDON STOCK EXCHANGE.

British Funds.

Calendar Years.

1910 ! 1911 j 1912

1913

191

1915 1916

1917 j 1918

1919

Name.
2J% (Goschen) 1923

Money. (Int. Jan.,

Apr., July, Oct.) .
2i (Childere) (Int.

Jan., Apr., Ju!.,Oct.)
21% Money (Int. Jan.,

Apr., July. Oct.)
31% War Loan, red.

1925-28. (Int. Mar.,

H
L
H

L
H

H
L

H
L
H
L

H
L
H
L
H
L
H
L

H
L
H
L
H
L

831

781

91i

811

761

82.3,

761

80}

801

741

79,1,

721

821

73}

76}

701

75»

7Hi

741

731

671

77 K',

691

80}

741

74}

671

68}

761

59}

65}

951
891

99|g
961

61}
56}
621
531
591
50

90}
83

971s
921

66i 631
501 i 531
56 f/ 611
531 S3i
531 59}
48 j 501

871 891^

49}

601

501

561

461

891

Sept.)

83,»B
1011

85
lOU

841

41% War Loan, red.
1925-45 (Int. June,

1001

Dec.)

891 98}

961 961
921 92}

831

5% War Loan, red.
1929-47. (Int. June,

96 ?«

Dec.)

89 [it

4% War Lo. n, red. 1929-

1031
991

103

42. (Int. Apr., Oct.)

98}

4% Funding Loan
1960-90. (Int. May,

781

Nov.)

4% Victory Bonds

851

(Mar., Sept.) .

National War Bonds.

First Series.
S% (Apr., Oct.), Oct.,
1922

79|

101

5% (Apr., Oct.) Oct.,

1011

1924

961

5% (Apr. Oct.), Oct.,
1927

::::::::::

1001

951

4% (Apr., Oct.), Oct.,
1927

100}

971

Second Series
5% (Apr., Oct.), Apr.,

1001

1923

5% (Apr. Oct.), Apr.,

lOOf

1925

:::::i:::;;

961

5% (Apr., Oct.), Apr.,

1001

1928

951

4% (Apr., Oct.), Apr.,

1001

1928

971

Third Series.
5% (Mar., Sept.), Sept.,

1001

1923

951

5% (Mar., Sept.), Sept.,

100}

1925

96.
100

5% (Mar., Sept.), Sept.,
1928

95}

4% (Mar., Sept.) Sept.,

100
97

1928

Fourth Series.
6% (Feb., Aug ), Feb.,

1001

1924

451

5% (Feb., Aug.), Feb.,

100}

1929

971

4% (Feb., Aug.). Feb.,

tool

NATIONAL DEBT

191

QUOTATIONS LONDON STOCK EXCHANGE [Continued).
British Funds.

Calendar Years.

1910 1 1911 I 1912 1913 1914 1915 1916 j 1917 ; 1918 1919

Name.

Exchequer Bokds.

3% Jan., 1930. (Int.

Jan., Apr. , July, Oct )

3% Jan.. 1930. (Int.

Jan., July)
5% Dec, 1920. (June,

Dec.)
5% Oct., 1921. (Int.

April, Oct.)
5% 1919-22, Apr., 1922.

(April, Oct.) .
6% Feb., 1920. (Feb.,

Aug.)
2i% Guaranteed, 1933
(issued under Irish
Land Act). (Int. Jan.,
July) .
2i% Guaranteed 1921

(Int., Jan., July)

3% Guaranteed red., 2

Dec, 1939. (Int. Jan.,

July) .

3% Local Loans, 1912.

(Int. Jan., Apr. July,

Oct.)

3% Met. Poiice Deb.,

1920. (Int. Jan., July)

3% Egyptian Guar. (Int

Mar., Sept.) 1951 .

2i% Greek Gua. Loans

(Int. Apr., Oct.), 1898

3% Mauritius, 1940

(Int. Jan., July)
.5J% Soudan Govt.Gtd.
Bds. (Int. May, Nov.)
3% Transvaal Gua.
1923-53 Money. (Int.
May, Nov.)
3% Transvaal Gua. red.
1st July, 1958. (Int.
Jan., July)
4% Turkish Gua. (Int.

Feb., Aug.) 1855
Bank of England

Div. %, 5th April .
Div. o/o, 5th Oct.
Bank of Ireland

Div. %, 1st Feb.

Div. %, 1st Aug.
^% India, 1931

Money. (Int. Jan.,

April, July, Oct.)
3% India, 1948 Money

(Int. Jan., Apr., Jxine,

Oct.)
2i% India, 1926

Money. (Int. Jan.,

April, Julv, Oct.)
3i% India Bonds,

1916-18. (Int. April,

Oct.)

84}

79;?

84
79i

84J I 791
76i 1 73

83, \, 79f
76J I 74J

92 92i I 86i
83} i 79i

96J I 94i : 90i 87i

92J -- -

91i

76y\ 79J 67 J
691 69 65i

65t
50i

76}

70i''c

82J
75}

94 J

85J

82i

91}

95}
91}

94i

91}
106}
102}
272
250
9
9
314}
293

11}

94}
92}

84}
79}

70}
66

94} 94}

93 U 92|

97} 95}

92} 88

84} 84

82 79}

82 81 t',

91}
89}

96}
90}

95;^
91}
106}
1102}
263
242}

9
303
269

97|
91

71
65}

101}
99ri

87}
87}

92}

90}

79}

73}

87*

87}

79} 68}
72} 66}

i
86} : 74}
74 j 71}

89} ! 81}
81f 78}
97 i 94}
95 1 89
95} 1 90
89} \ 87}
80} 75}
78 75
92}
92}

83 83}

79 rJ 79}
83 83
81,il 78
100} 101}
99 ! 98

100 J lOOJ
99} 97 J,

101 100}
99} 1 96

102} 101}
100} 99}

93} 91} 95
87} 86} 88}

92} 91

88} : 86}

104} 102}

101} 99}

251 251

234 224}

9 9

9 1 9

280} 243

240 215

11 10

10 10

94} 91}

89} { 84,'s

80} 78}
76} 71

67} 65
63} ; 60}

100}f, 100}
99} 98}

60^ 71
53} 55

71}

54 *„

61}
55

78} 61}

57} 56i

91} I 93}

91} I 90}

72} j 69}

68 66}

75,>„ 75}

63
53}

63}
56}

67
57}

58}
51}

63
53}

64
54}

90}
86

94}
87}
103}

101} !

256 249}

234 230

10 I 10

10 ,10

'240} 230}

222} 182}

10 10

93}
84

80}
71}

66}

66} 64}

58} ! 55}

97} 99}

72}

66}

69}

88} 68
62} 63}

75
230}
194}

79}

72
205
190

200} 195

172 170

10 10

83} 80} 69}
80} 63} 1 62}

98}

73}

84}

69}

64}

74}

70}

73}
62

70
62

87}
74
224}
186}
10
10

223 226

190 204

10 12

70}
67}

70
63}
83}
71

226

191}
10
10

711
69}

66} 60}
59 ; 57

100,
96 ■

69}
54}

60} 64
53} 53

74
61}

57} SO
46} 1 45}

97f? 98} I 99}
97} j 96} I 99}

53}
44}

71}
60

61}
50}

51 J
43}

192

ENGLISH PUBLIC FINANCE

QUOTATIONS LONDON STOCK EXCHANGE [Continued).
British Funds.

Calendar Years.

1910 1911

1912

1913

1914 1915

1916

1917

1918 [ 1919

Name.

3J% Indian Rupee

Paper. (Int. various

6!H

64»

64J

64*

tii;},

534

Dates) .

6'2i

62i

63i

62i

63i

48*

424

484

3i% Indian Rupee

Paper, 1854-5. :(Int.

64»

64i

Mkh

624

524

68r

June, Dec.)

62J

63i

48J

4:^4

48:

3% Indian Rupee Paper

1896-7. (Int. June,

52i

541

53i

494

454

384

414 58

Dec.)

53»

53}

534

484

434

3V4

414 43

3i% Isle of Man. (Int.

96J

97,1,

96+

99i

96 r!,

89i

99,',! 994

Feb., Aug.) .

96i

974

964

97} ! 97

3% Isle of Man Deb.,

1919-29. (Int. Feb.,
Aug.) .

881
88i

87J
85J

804

794

77J

Authorities for Quotat'Ons 1910-1919, Investors' Monthly Manual — London. Stock
Exchanges London and Provincial Ten-Year Record of Prices and Dividends — 1909-1918,
Mathieson, Fred C. C. & Sons, London, 1919. Mathieson's Handbook for Investors for 1920.

QUOTATIONS.

NEW YORK STOCK EXCHANGE.

British Funds.

Calendar Years.

1914

1915

1
916

1917

1918

1919

Name.

5% Anglo-French

5yr. .

984

964

934

974

97J

(Int. Apr. and Oct.)

93J

924

814

884

954

United Kingdom of

Great Britain and

Ireland

2 yr. 5% Notes 1918.

99}J

(Int. Mch. & Sept.)

3 yr. 54% Notes

1919 .

98}

98J

100

(Int. May & Nov.)

974

934

954

5 yr. 54% Notes

1921 .

984

91 i

994

(Int. May & Nov.)

844

94}

54% Convertible

Notes .

lOOi

1918 .

54% Convertible

Notes 1919 .

1014

105

(Int. Feb. & Aug.)

954

974

54% 20 yr. Gold Bond

1937 .

101

1014

(Int. Feb. & Aug.)

100

96$

10 yr. Conv. 54s 19-9

(Int. Feb. & Aug.)

944

3 yr. Conv. 54s 1922

984

(Int. Feb. & Aug.)

954

NATIONAL DEBT

193

MONEY RATES.
London Daily Average.

Bank Rate.

1914

1915

1916

1917

1918

1919

First half
Second half .

3 4 7

4 16 10

i s. d.
5 0 0
5 0 0

i s. d.
5 0 0
5 18 6

i S. d.£ 5. d.

5 6 05 0 0
5 0 05 0 0

£ s. d.

5 0 0
5 6 0

Whole year .

4 0 9

5 0 0

5 9 3

5 3 05 0 0

5 3 0

Market Rate — Three Months Bills.

First half
Second half .

1 s. d.

2 10 2

3 5 3

1 s. d.

2 9 0
4 19 3

i s. d.l s. d.\£ s. d.£ s. d.

4 17 64 16 73 13 03 10 0

5 11 04 15 93 10 54 7 9

Whole year .

2 17 8

3 14 1

5 4 34 16 23 11 93 18 10

Deposit Rate — Banks.

First half
Second half .

£ s. d.

1 14 7

2 10 0

£ s. d.\£ s. d}£ s. d.

2 0 03 10 0,4 0 0

3 4 13 18 94 0 0

£ s. d.

3 2 0
3 0 0

£ s. d.
3 0 a
379

Whole year .

2 2 42 12 o's 14 4I4 0 0

3 1 0

3 3 10.

Short Loans.

First half .
Second half .

£ s. d.t;^ s. d.

1 1 1\\1 11

2 5 114 3 9

£ s. d.\£ s. d.
4 5 114 11 0
4 19 64 5 6

£ s. d.

3 6 2
3 4 11

£ s. d.

3 4 7
3 14 7

Whole year .

2 4 32 18 4

4 12 84 8 3

3 5 6397

TREASURY BILLS.

Discount Rate.

Rate

Date.

Maturity.

1917.

19th June

3 and 6 months bills.

27th Dec.

1918.

14th Feb.

i> i> >>

1919.

31st May

—

Sales discontinued.

14th July

2 months bills — (Sales discontinued 15th August),

6th Oct.

7th Nov.

3 and 6 months bills.

For further data about Treasury Bills, see Item 21, page 185, also Index.
13— (1823)

194

ENGLISH PUBLIC FINANCE

SOVEREIGNS OF ENGLAND.
From the Conquest.

Reign Reigned,
Sovereign. began, years.

Norman Line.

William the Conqueror . 1066 21

WiUiam Rufus . . 1087 13

Henry I . . . 1 100 35

Stephen . . . .1135 19

House of Plantagenet.

Henry II
Richard I
John

Henry III
Edward I
Edward II
Edward III
Richard IF

1154
1189
119L)
1216
1272
1307
1327
1377

House of Lancaster.

Henry IV
Henry V
Henry VI»

1399
1413
1422

House of York.

Edward IV
Edward V
Richard III

1461
1483
1483

House of Tudor.

Henry VII
Henry VIII
Edward VI

1485
1509
1547

Deposed 1399.
Deposed 1461.

35
10
17
56
35
20
50
22

Sovereign.

Reign Reigned,
began, years.

Mary I
Elizabeth

1553
1558

House of Stuart.

James I . . . . 1603
Charles I » . . . 1625

Commonwealth declared

May 19th, 1649
Oliver Cromwell

Lord Protector 1653-1658
Richard Cromwell

Lord Protector 1658-1659
Charles II . . . 1660

James II* . . . 1685

WUUam III J

and V . . 1689

Mary IP )
Anne .... 1702

House of Hanover.

George I
George II
George III
George IV
WiUiam IV
Victoria .

House op Kent.
Edward VII . . . 1901

House of Windsor.
George V . . . 1910

' Beheaded 1649.
' Deposed 1688.
■* Died 1694.

5
45

22
24

1714

1727

1760

1820

1830

1837

national debt 195

Authorities.

The statements contained in this book are for the most
part based upon official data, chiefly derived from the
following publications —

Period. Revenue, Expenditure, Currency and Debt.

1688-1869 House of Commons Sessional Papers, Vol. XXXV, 1868-69,
No. 366. This monumental work of H. W. Chisholm gives
complete data in regard to revenue and expenditure and
the debt.

1870-1919 Finance Accounts. See page 140.

1919 and Budget Speeches as printed in various publications ; also

1920 semi-official data tabulated in The Economist and The
Statist.

1914-1919 Committee on Currency and Foreign Exchanges After the War
— Lord Cunlifie, Chairman. First Interim Report — C.
9182, 1918. Final Report— C. 464, 1919.

The Debt.
1694-1786 History of the Earlier Years of the Funded Debt. A. T. King.

House of Commons Sessional Papers, 1898. Vol. LII —

C. 9010.
1786-1890 Proceedings of the Commissioners for the Reduction of the

National Debt. House of Commons Sessional Papers,

1891. Vol. XLVIII— C. 6539.
1836-1914 National Debt. House of Commons Sessional Papers,

1914. Vol. L — C. 7426. Similar statements are published

annually.

Rev'enue, Expenditure and Debt.
Of secondary sources the most valuable have been —

AsHTON, John. — A History of from the earliest times to the

English Lotteries. London, present day. London, 1884.

1893. The authoritative work on the subject.

The best authority. Freeman, Edward A. — The

Atton, Henry, and Henry Growth of the English Constitu-

HuRST Holland. — The King's Hon from the Earliest Times.

Customs. New York, 1908. London, 1906.

Covers from earliest times to 1800. GiFFEN, Robert. — The Growth of

BoGART, Ernest L. — Direct and Capital. London, 1889.

Indirect Costs of the Great World ^ exceUent study of national wealth.

War. Hall, Hubert. — The Antiquities

Carnegie Endowment for International «"^ Curiosities of the Exchequer.

Peace. New York, 1919. London, 1891.

Brisco, Norris a.— The Eco- Supplements Madox. See below.

nomic Policy of Robert Walpole. ^ History of the Custom Revenue

New York, 1907. "^ England to 1827. 2 Vols.

A finished study; the best for the London, 1885.

period. Mr. Hall is one of the most thorough

DowELL, Stephen.— /i History of students of early fiscal methods. His

™ ,. J _ ._,-',' historv of the Customs is the best

1 axation and Faxes m England, authority.

196

ENGLISH PUBLIC FINANCE

Hamilton, Robert. — An Inquiry
Concerning .... the National
Debt. Edinburgh, 1818.

A scientific study. Hamilton deserves
the credit for convincingly demon-
strating the fallacy of Pitt's sinking fund.
A concise, authoritative exposition of
the subject.

HiGGS, Henry. The Financial
System of the United Kingdom.
London, 1914.

A summary exposition of our financial
sj'stem, its organization, methods and
forms of procedure.

Hughes, A., Crump, C. G., and
Johnson, C. — " De Necessaries
Observantiis 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
Government of England. 2 Vols.
New York, 1912.
The best authority on English govern-
mental methods.

Madox, Thomas. — The Ancient
Dialogue Concerning the Ex-
chequer. London, 1758.
The best authority on the earliest history
of EngUsh public finance.

Poole, Reginald L. — The Ex-
chequer in the \2th 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 authority on
public finance from 1154, when the first
records become available, to 1485. He
is reputed to be very accurate.

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. HI
contains data in re Crown finance in the
time of Queen Elizabeth not to be
found elsewhere.
Scroggs, W. O. — English Finances
under the Long Parliament.

Quarterly' Journal of Economics.

May, 1907.

An important study.

SiLBERLiNG, NoRMAN J. — British
Financial Experience, 1 790- 1 830.
In The (Harvard) Review of
Economic Statistics, October,
1919.

An excellent study of commodity prices,
/ wages, prices of gold and silver, exchange,
and interest rates.

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.

Stamp, 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 authori-
tative studies which have been made on
these subjects.

Stubbs, William. — The Constitu-
tional History of England in its
Origin and Developynent (1066-
1485). 3 Vols. Oxford, 1880.
The standard work on the English
Constitution. Invaluable.

Williams, W. M. J. — The King's
Revenue. London, 1908.
An excellent guide to a correct imder-
standing of Treasury and budget state-
ments.

WlLLOUGHBY,WM.F.,andWESTEL,

W. ; McCuNE, Samuel Lind-
say.— The System of Financial
Administration of Great Britain.
New York, 1917.

Describes particularly the English budget
system.

Banking.

ANDR^ADis, A. — History of the
Bank of England. London,
1909.
The acknowledged best authority.

Bagehot, Walter. — Lombard
Street. New York, 1912.
For administrative methods.

NATIONAL DEBT

197

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 Share-
holders of the London Joint
City & Midland Bank.

These very able addresses were delivered
at the annual meetings, 1915 to 1919
inclusive.

Palgrave, R. H. Inglis. — Bank
Rate and the Money Market.
New York, 1903.

An invaluable study of the banking
reserves and discount rates from 1845.

Philippovich, Eugen von. — His-
tory of the Bank of England.
Washington, 1911.

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
England. London.

The standard authority for the period
covered.

Withers, Hartley. — The English
Banking System. Washington,
1911.

a concise review prepared for the
National Monetary Commission.

War and Lombard Street. Lon-
don, 1917.

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, 7, How

market was protected in 1914, 7
Accounting Officers of Exchequer,

140
Aid, 57 — See Scutage, taxation
Aids, Feudal, 53
Alfred, Kang, 49
Allies and Dominions, Loans to

31st March, 1920, Table, 29
American Securities, Mobilization

of, 1914-1919, 20

War — See War

Amsterdam, Bank ot, established

1609, 80, 154

Anglo-French Loan, 20 — See also
Debt Table, 182

Anglo-Saxon Kings, Finances, 49-
52

Anne, Queen, 89

Annuities, 87

Antiqua Custuma, i.e., The
ancient and equitable duties, 56

Assessments, Monthly, 58

Assets, National, 17

Assize of Arms. A medieval
term. Under the assize every
freeman was required to pro-
vide himself with arms and
armour according to his means
and rank and to stand ready
for military service.

Australia, Cost of War, 1914-
1919, 1

Auxilia. A medieval tax on
tenants.

Banco del Giro, 153

' della Piazza del Rialto, 153

Bank Charter Act of 1844 — See
Bank of England, 170

of Amsterdam, 154

of England : Advances to

Government on Credit of Ways
and Means, 36 ; Bank Act of
1844, terms of, 170, 171 ; sus-
pension of in 1847, 1857, 1866
and 1914, 172 ; Bank Rate-
Effect of in regulating money

rates and the exchanges, 148,
normally controls money mar-
ket, 148 ; Branches, 169 ; Build-
ing, 177 ; BuUion Report 1810,
164 ; Capital — original, 158 ;
Charter granted, 24th July,
1694, 75 ; Charter Act of 1844,
169 ; Clerical machinery, 177 ;
" The Court," 176 ; Commit-
tees, 176 ; Crises, 18th Century,
and the Bank, 1 60 ; Directors —
How elected, 174 ; personnel,
174, committees of, 176,
court of, 176 ; Early His-
tory, 157 ; Exchequer — rela-
tion to, 137 ; First bank in
modem sense, 147 ; Fund of
Credit idea, 88, 158 ; French
War, Great, and the bank, 161 ;
Functions — acts as banker to
nation, 138, 148, 159, carries
reserves of other banks, 148,
conducts general banking busi-
ness, 147, issues bank notes,
147, mobilizes national credit
resources, 149 ; Fund of Credit,
88, 158 ; Government of, 174,
committees, 176, clerical ma-
chinery, 177, directorate, 174 ;
Governor and Deputy Gover-
nor— How selected, 174, change
every two years, 176, duties,
176 ; Loan from Bank of
France in 1839, 170 ; Note issue
— rights in England practically
exclusive, 147 ; Notes made
legal tender in 1833, 169 ;
Officers, 175 ; Origin, 157 ;
Privately owned, 158 ; Privi-
leges and obligations under
Act of 1844, 171 ; Quotations
for stock, 188 ; Reserves —
ultimate banking r. of nation
held, 148 ; Reserves — rule in re
prior to 1844, 170 ; Reserves in
1839, 170 ; Rest (reserve) estab-
lished 1722, 169, Restriction Act,
163 ; Resumes specie payments

199

200

INDEX AND GLOSSARY

in 1821, 165 ; Rule for Conduct
of business prior to 1844, 170;
Statements required, 169, com-
ment of the Economist thereon,
170 ; Stockholders' liabihty,
169 ; Specie payments sus-
pended 1797-1821, 162 ; effect
on exchanges and prices,
163
Bank of France : Founded in 1800,
171 ; Loan to Bank of England
in 1839, 170

of Genoa or Compania (Casa)

di San Giorgio, Origin dates
from 1148, 154

of Ireland, 138

of Venice or Banco del Giro,

Founded 1619, 153

Bankers — Itahan and Plantagenet
Kings, 151

Banking — Italian corporate banks
— eariy, 153

, Joint-stock — Introduced in

1826,76,166; Privilege extend-
ed to London 1833, 76. English
forbidden to issue notes, 166,
167, 171 ; Number of banks
still having privileges in 1920,
167 ; Number and resources in
Dec, 1919, 168

credits — How created, 37 ;

How they helped to finance war
1914-1920, 33; Reserves v.
Credits, 34

Reserves — v. Credits, 1914-

1920, 34 ; ntimate carried in
Bank of England, 148 ; Scotch,
148, 179

Statements — not required in

England except by Bank of
England, 169

Banks, Country — failures in 1793,
108, 160

, Irish, 148, 179

Banks or Partnerships of more
than six persons forbidden in
1708 to issue notes in England,
166; In 1826 restrictions re-
moved (until 1844) on banks
located 65 miles from London,
167

Benevolences, 60

Bona Vacantia, 54

Boer War, 30

Borrowing — See Debt

Brig-bote, 49

British Empire, Cost of War to
1914-1919. 1

Budget, 134

From the French bougette, a
little bag in which the Chan-
cellor 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."

(1920-1921). 15

Bullion Report, 164
Burg-bote, 49

Canada— Cost of War to (1914-
1919), 1

Capital Levy urged in 1715. 101

Chamberlain, Austen, 15, 16, 17,
18, 22, 29

Chancellor of the Exchequer —
Ancient times, 130 ; Modem
times, 134, 136 — See Chamber-
lain. Austen ; Gladstone, Wil-
liam ; North, Lord ; Pitt,
William ; Walpole, Robert

Charles I — Government without
Parliament, 69

II, 65, 70 ; Army dis-
banded, 71 ; Clergy consent to
be taxed by Parliament and
obtain right to vote at elections,
72 ; Dutch wars, 72 ; Excise
Taxes, 72 ; Fire of London. 72 ;
French loan makes him inde-
pendent of Parliament, 73 ;
Seizes deposits of Goldsmiths,
65 ; Parliament ends Dutch war
by withholding supplies, 72 ;
Plague, 72 ; Poll tax — greatest
known — cla.sses affected, 71 ;
Stop of Exchequer, 65, 72, 156 ;
Revenue — lOths and 15ths
abandoned for monthly assess-
ments, 72 ; Permanent revenue
given in lieu of prerogative
rights, 72

Charters : Magna — extorted from
King John in 1215. The great
charter of the liberties of Eng-
land, 47. 57, 66 — See Taxation :
Aids, Customs, Escheats, Scut-
age, Purveyance. Mercatoria —
published in 1303. The Magna
Charta of Commerce. The basis
of the free trade system, 66

INDEX AND GLOSSARY

201

Chisholm, H. W., Monumental
reports on debt and revenue,
114, 195

Church, The, Revenues derived
from, 68 ; Spoliation of by
Henry VIII, 68

Circulation, Bank Note : English,
166, 167 ; Bank of England,
169-173 ; Joint-stock banks,
166 ; Private banks, 167 ; Irish
banks, 179 ; Scotch banks,
179

Civil Government, Cost of, 1833-
1920, 124-126

Rights, Revenues and civil

rights, histories bound together,
47

War Period. 1649-1660, 69

Clergy : Supplies voted from own

estate until time Charles II, 72 ;
Obtain right to vote at elections,
72

Coinage : Debasement as source
of revenue, 54, 60 ; Debased by
Edw^ard I, Edward IV, Henry
VIII, 60; Irish— debased by
Elizabeth, 61 ; Restored by
EUzabeth, 61 ; Restored by
V^^iUiam III, 61

Commerce, Foreign, Anglo-Saxon,
50

Commons : First admitted to
share in taxing power (1295),
66 ; Certain revenues voted
yearly to insure control of
government, 118 ; Right to ini-
tiate money legislation becomes
a precedent in reign of Henry
IV, 67; WilHam III and,
118

Commonwealth and Protectorate
(1649-1659): A period of active
training for self-rule, 69 ; Cost
of government high, 70

Compania di San Giorgio, 154

Compera del Capitalo, 154

" Consols," 105, 183

Constitutional Government
veloped by control of
under Plantagenets, 66 ;
caster and York, 67 ; Tudors,
67 ; Stuarts (earlier), 68 ; Com-
monwealth and Protectorate,
69 ; Stuarts (later), 70 ; Wilham
III, 48

Continental Policy, Napoleon's,

De-
purse
Lan-

Stimulated home trade of Eng-
land, 163

Contributions — See Revenue

Corn Laws repealed, 77

Cotton Trade, How financed, 1914,
10

Credit, Letter of, reign of John,
152

■, National, High sense of

national honour at base of
national credit, 117

Structure : In war, 1914-

1920, 39

Credits, Loans to Dominions and
Allies, 31st March, 1920— Table,
29

Cromwell, 70

Crown Colonies, Cost of war to,
1914-1919, 1

Finance, 1066-1688, 47

Lands, 59

Jewels Pawned for Debt, 62

Crusades and Italian bankers, 151
Cunliffe, Lord, Committee on

Currency and Foreign Ex-
changes, 36

Currency and Foreign Exchanges
after War, Committee on, 36

— — , Joint-stock Banks deprived
of right to issue notes in 1844,
171; Note and Deposit — actual
and per capita, 1913-1919,
Table II, 42 ; Note and deposit
V. Gold Reserves, Table III, 44

notes — See Treasury Notes

Customs, 55 ; Anglo-Saxon, 50 ;

Antiqua-Custuma, 56 ; Farm-
ing, 150 ; Free Trade — absolute
since 1866, 77 ; Charta Merca-
toria, 66 ; Informal, 56 ; Magna
Charta, defined, 56 ; New Cus-
toms (Nova Custuma) 56 ; Old
(Antiqua-Custuma), 56 ; Oldest
branch of revenue, 55 ; Origin,
50, 55 ; Prisage — two casks of
wine from each cargo, 56 ;
Protective Tariffs, 56 ; Sub-
sidies, 56 ; Tariffs to promote
and regulate commerce, 56 ;
Tariff reform, 122 ; Tunnage
and Poundage, 56

Dane-geld, 49

Debt, Crown : Compulsive loans,
64 ; Crown jewels pawmed for
debt, 62 ; First recorded, 62 ;

202

INDEX AND GLOSSARY

Foreign borrowing, 64 ; Interest
payments (usury) interdict in
medieval times, 62 ; Henry
VIII repudiates, 63 ; Security
given — form of, 63 ; Stop of
Exchequer, 65
Debt National : Ability to carry
due to progress of the arts and
sciences, etc., during 18th and
19th Centuries, 32, 115, 128;
American War (1775-1783), 94 ;
Amount at close of historical
periods, 1688-1817, 81 ; 1817-
1919, 31 ; Annuities, 87 ; ton-
tine, 87 ; V. Bank Assets, 39 ;
Began in 1688, 74, 79, 82 ;
Burden, Comparative, 1688—
1817, 114, 116; 1688-1920, 15,
142-5; 1817-1914,128; 1817-

1919, 30, 31 ; Cause, chieflv
war, 76, 79. 112, 119, 143, 145";
Charge v. National Income, 30,
115, 128; Competitive bidding
for loans, inaugurated by Pitt,
107 ; " Consols," origin, 1749,

105, 183 ; Consols, quotations,
1697-1920, 188, 190; Credits
to 31st March, 1920, 29 ;
Debenture — copy of one in
reign of John, 151 ; East India
Co., 89 ; Exchequer Bills, 75,
85, 86 ; Exchequer bonds, 184 ;
Exchequer order and tallies, 83 ;
Floating debt— 1784, 106;

1920, 25, 27 ; Foreign securi-
ties mobilization, 1915, 20 ;
French War Debt, 108-117;
" Funded " and " unfunded "
debt defined, 82 ; Funded, early
forms, 87 ; Fund of Credit,
88 ; Loans to Dominions and
AlUes, 31st March, 1920—
Table, 29 ; Lottery Loans, 93,
Lotteries, State, 97 ; Loyalty
Loan of 1796, 110; Maturities
of debt on 31st Dec, 1919, 25 ;
Navy supply bills — manner of
issue time Charles II to 1784,

106, discount in market, 1687,
85, method of issue reformed
by Pitt, 106, funded by Pitt in
1785 and 1786, 106 ; Origin.
74 ; Paying for the War bonds,
35 ; Reduction, Proposed 1920-

1921, 26, 27; Refunding and
reduction of interest. 1749, 105,

1784, 106, 1817-1914, 127,
1920-1921, 26, 27 ; Sinking
Fund : Walpole's, 1717, 101,
after 1727 inoperative for debt
reduction, 102 ; Sinking Fund,
Pitt's, 1786-1829. 102, fallacy
of. 103, Sinking Pounds, Modern.
104. 186. old, 186,- new, 186.
war debt, 1914-1920 (known
as depreciation fund for 4%
and 5% War Loans ; Sinking
Fund for Victory and Funding
Loans), 14, 26, 187; 31st March,
1920, complete descriptive
tables, 181-187 ; Spanish and
Austrian Wars debt (1739-
1748), 81, 82 ; Terms on which
loans were placed, American
War, 95-99, Great French
War, 108. 109, 114, Great
World War, 1914-1920. 19-25 ;
Transfer regulations, 186 ;
Treasury Bills, 8, 11, 27, 75.
185 ; Treasurv Bonds, 27 ;
Unfunded debt defined, 82,
early forms of, 83 — army and
navy supply bills, 85, exchequer
bills, 85, 86, exchequer bonds,
184, exchequer order, 84, tallies,
83, treasury bills, 8, 11. 185,
ways and means advances, 36 ;
War Debt. 1914-1920, 19;
War Savings Associations,
1914-1920, 21 ; v. Wealth,
1688-1817, 81 ; 1817-1914, 128

" Demesne " — Domain, 49, 53 —
See Prerogative

Discount Rates — Money, 1898-
1914, 4; 1914-1919. 193

Dominions and Allies— Loans to.
31st March. 1920, 2, 17 ; Table,
29

Dominions : Expenditures for
War, 1914-1919, 1, 2 ; Per
cent, met by taxation, 3

East India Company, 89
Edward the Confessor, 49

I : Coinage Debased, 60,

Commons admitted to share in
taxing powers in 1295, 66 ;
Laws codified by, 66 ; Tannage
and Poundage originate in
reign of, 56

Ill : Default on obliga-
tions to Italian bankers, 153 ;

INDEX AND GLOSSARY

203

Necessity for revenue gives
Parliament opportunity to ob-
tain concessions in exchange for
grants, 67 ; Poll tax first laid in
1337 ; Tenths and Fifteenths
originated in his reign, 57
Edward IV, Coinage debased, 60

VI, Foreign loans, 64, 68,

152

Elizabeth, Queen, Foreign loans,
64, 152 ; Lottery, 93 ; Coinage
restored, 60 ; Sanctions base
coinage for Ireland, 61 ; Debts
— father, brother and sister
paid, 64

Estate duties, 59

Exchequer (The public Treasury)
— Ancient Accounting system
of, 130 ; Anglo-Saxon, 52 ;
Budget, 134 ; Chancellor of,
136 ; ConsoUdated Fund, 137 ;
Departments and officials, 136 ;
Emergency measures, 1914, 5 ;
Expenditures, 1688-1817, 118.
120 ; 1688-1920, 145, and Bank
of England, 158 ; Modern, 135 ;
Norman period, 53, 58 ; Re-
ceipts, 1688-1830, 118-121;
1688-1920, 142 ; Talhes, 132 ;
Treasury, 133 ; and Bank of
England, 137

Bills : First issued, 1696,

75, 85, Reign of William III,
86, 158 ; Largely superseded
by Exchequer bonds (1853),
184 ; and Treasury bills (1871),
11. 185

Bonds, 184

Order and Tallies, 83, 84

, Stop of, 65

Excess Profits Tax— See Taxation
Excise Taxes : Introduced from
Holland in 1643, 58 ; of Charies
II, 72 ; French war period, 121
Expenditure, 2^ centuries v. six
years, 15 ; Character of, 1817-
1914, 123; Civil — increase
after each war, 120 ; Civil
Government, 1817-1914, 123;
Distribution, 1833-1914, Table,
126 ; Debt charge, increasing
burden after each war, 119;
Debt charge, 1817-1914, 123 ;
Military steadily rises, 119,
124, 125 ; Principal objects of,
1688-1920, 145 ; War chief

cause, 77 ; 1688-1830 for alter-
nate periods of peace and war,
120; 1688-1920, 15, 145; MiH-
tary— 1816-1914, 124 ; 1915-
1920— Table, 15

Exchanges, Foreign, Working of,
described, 7

Export Merchants, Advances to.
in 1914. 9

Extortions — Forms of, practised
by early kings, 60

Factor, The King's, 152

Fairs, Anglo-Saxon and Norman,
51

Farm (or Ferme), Farming cus-
toms, how done and why, 150

Federal Reserve Banks — U.S. —
carry ultimate specie reserves
of all banks, 34

Ferme — See Farm

Feudal system : Aids, 53 ; Anglo-
Saxon, 49 ; Knights service,
53 ; Norman sj^stem of land
tenure, 53

" Finance Accounts," 58, 141

, National : Dutch experi-
ence a valuable asset to William
III, 80 ; Germs of modem
financing methods found in
early practice, 58

Financial conditions in July,
1914, 4

Fines, 54, Extortionate, 60

Fiscal system to-day : Account-
ing of&cers, 140 ; Bank of
England, 137 ; Bank of Ire-
land, 138; Budget, 134;
Exchequer, 135 ; Chancellor
and Aids, 136 ; Consolidated
Fund, 137 ; Financial Reports,
141 ; Paymaster-General, 139

Flemish merchants. Loans to
Edward VI. Mary and Eliza-
beth, 64, 153

Folk-land, 50

Foreign investments, 5

securities, Mobilization of, 20

Forests, The King's, 53

Forest laws, 53

Free Trade — See Customs, 66, 77

Fumage — See Taxation, 59

Fund of credit, 88, 158

Genoa, Bank of (Ufficio di San
Giorgio), Cartulary notes —
Character of business, 154

204

INDEX AND GLOSSARY

George, David Lloyd, 5

" Giro payments " defined, 153

, Banco del (Bank of Venice),

153

Goldsmiths, The, 155, 159

Grants — See Aid

Great Britain — See United King-
dom

Gresham, Sir Thomas, King's
factor, 152

" Hearth-Money," 57

Hereditary revenues — See Pre-
rogative, 53

Henry II : Exchequer records
date from his reign, 47

Ill : The first king of

England whose debts are re-
corded, 62

IV, 67

V, 63

VIII, 60, 63, 64, 68

" Here-geld," 49

Hide — of Land : A medieval
measure of land — about 100
acres, 50

Holden, Sir Edward H., 10 ;
process of payment for govern-
ment loans described, 35

Hearth tax, 50

" Heavy horse," 97

House duty, 59

Income, National : Defined, last
T, 127; 1688-1817. 116, 117;
V. Debt Charge, 115; 1817-
1914, 128; 1920, 3

tax — -See taxation. First

modern, 1799, 75, 123

Invisible trade balance, 5

India, Cost of war to, 1914-1919,

I. 17

Inflation, High prices and bank
credits, 43 ; By bank deposit
credit, 1914-1920, 11 ; Methods
of — used to finance war 1914-
1920, 11 ; One measure of, 45 ;
By notes, bank and treasury,

II, 41 ; Prices v. Physical
volume of trade, 43

Interest : Charge for, forbidden
in medieval times, 62 ; Pay-
ment forbidden by Church, 62 ;
Payments in lieu of, 62, 65, 150

" Issue " — English Treasury term
for " payment "

Italian Banks, Early corporate,
153

James I, Financial methods re-
viewed, 68, 69

II, 73

Jews, Taxation of, 57

John: Debenture of, 151 ; Letter

of Credit of, 152

, Magna Charta (1215), 47, 66

Joint-stock Banks — See Banks,

Joint Stock

Kemmerer, E. W., Physical
volume of trade, 1913-1919, 43
Kindersley, Sir Robert, 22, 23
King : Demesne, 49 ; Factor,
152 ; V. People, 47, 48 ; Pre-
rogative, 53 ; Knights Service,
53

Lancaster and York, Period of,

67
Lands : Crown — See Demesne ;

Taxation of — See Taxation
Letter of Credit— A. D. 1201, 152,

originated in Italy, 150
Licence fees — See Taxation
" Light Horse," 97
Lombards, 155
Loans — See Debt, National
London Joint City & Midland

Bank, 26
Long Parliament (1640-1653), 57 ;

Post Office inaugurated by, 58
Lotteries — 5^^ also Debt, National

First in England (1569), 93;

Last (1826), 99; Private lot-
teries illegal but flourish, 98 ;

State lotteries, 97-100
Lottery Loans, 94 — See Debt,

National

Tickets, 96

Magna Charta — See Charters

Mary, Queen, 64

Merchants, Anglo-Saxon times, 51

Million Bank, 88

Mobilization of Foreign Securities,
20

Monopolies, 60

" Monthly Assessments " — intro-
duced by Long Parliament, 58 ;
See Taxation

Moratorium (1914), 7, 10

INDEX AND GLOSSARY

205

Napoleon, Continental Policy —
Result to England, 163

National Debt — See Debt, Na-
tional

Na\-y Bills, 85, 106— See Debt,
National

Newfoundland, Cost of War, 1914-
1919, 1

New Zealand, Cost of War, 1

Nicholson, Prof. J. Shield, 39

Norman Period, 49

North, Lord, Financial Methods
in American War, 96

Northcote, Sir Stafford H., 128

" Nova Custuma," i.e., New Cus-
toms— See Customs, 56

" Omnium," 96

Paterson, William, proposes or-
ganization of Bank of England,
157

Paymaster-General, 139

Peel, Sir Robert, brings about
separation of Banking and
Issue departments of Bank of
England, 171

" People," Definition of term as
used herein, 47

V. King, 47

Peruzzi, Italian bankers, ruined by
Edward III, 153

Personal Property, Taxation,
dates from reign of Edward
III, 58 — See Taxation

Pipe Rolls (" Rolls of account "
in text), 47

Pitt, William, The younger : Chan-
cellor of Exchequer, 1784, 106 ;
Competitive bidding for loans
and army supplies inaugurated
by, 107 ; Income tax, modern,
originated by in 1799, 75 ;
Methods used in financing
French War, 108, 110, 161;
Navy Bills funded by, 106 ;
Recalled in 1804, HI; Death
of, 1806, 111

Plantagenets, Development of

Constitution under, 66
Pole, William de la, 153
Poll-taxes, 57 ; of Charies II, 70

— See Taxation
Post Office, Introduced by Long
Parliament, 58

Pre-emption — See Prerogative, 54
Prerogative, King's, 53 ; Aids,

53 ; Benevolences, 54 ; Bona
Vacantia, 54 ; Coinage, 54 ;
Contributions, 54 ; Demesne,
49, 53 ; Estates, unclaimed,

54 ; Estrays, 54 ; Extortions,
54 ; Feudal Aids, 53 ; Fines,
54 ; Fish, large, 54 ; Forests,
53 ; Forest laws, 53 ; Idiots,
Custody of, 54 ; Loans, Com-
pulsive, 54 ; Monopolies, 60 ;
Knight's service {See also Scut-
age), 53 ; Pre-emption, 54 ;
Prisage of wine {See New
Customs), 55 ; Purveyance,
Anglo - Saxon, 50 ; Norman
times, 54 ; Queen's Gold, 54 ;
Treasure trove, 54 ; Trinoda
Necessitas, 49 ; Wrecks, 54 ;
Surrendered by Charles II, 72

Prices, Index Number, 1913-1919,
45

and Bank Credits, 43, v.

Physical Volume of Trade, 43

Public Debt — See Debt, National •

Expenditure — See Expendi-
ture

Purveyance : Anglo-Saxon, 50 ;
Norman times to 1688, 55 ;
See Prerogative

Queens' gold, 54

Quotations : Bank of England
Stock, 1697-1919, 188; Con-
sols, 1697-1919, 188; War
issues, 1910-1919, 190

Ransom : King Richard's, 59 —
See also Feudal Aids under
Prerogative

Reserves : Specie, 1913-1919—
Table, 44

Restriction Act, 163

Revenue — National, 118; Aver-
age annual, 1688-1830, 121 ;
At historic periods, 1688-1920,
142 — See Debt, Prerogative,
Taxation

Revolution of 1688, dividing hne
between old and new England,
48, 74

Richard I, Income tax first levied
by, 59

II, 64, 66

2C6

INDEX AND GLOSSARY

" Scrip," 97

Scutage (" 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 (53) ). An early
form of land tax, 57

Ship-geld, 50 — See Taxation

Sinking Funds : Walpole's, 101 ;
Pitt's, 102 ; Modem, 12, 18, 26,
104, 186

Social betterment, expenditure
for, 125, 144

South Sea Company, history,
purpose and scheme of, 89

Stamp duties, first imposed in
1671, 58 — See Taxation

Stock Exchange loans, how pro-
tected 1914, 9

Stuart and Cromwellian period,
one of transition from autocracy
to democracy, 68

Stuarts, last of autocrats, 68

Subsidy : Customs, 55 ; A form of
tax, 56 — See Customs ; also
Taxation

Tally — (talea — a slender staff, a
rod, stick, stake, bar), 132 — See
Debt — national — unfunded, 83 ;
" Tallies of assignment," 83 ;
" Tallies of loan," 83 ; Ex-
chequer order, 83, 84

Tariff — See Customs, 77 ; Reform
of, 1842-1914, 77, 122

Taxation : Aid (Scutage) A form
of land tax, 57 ; Aliens, 57 ;
Anglo-Saxon : trinoda necessi-
tas — brig-bote, here -geld, or
here-fare, burg-bote ; also, dane-
geld, fumage ,59, or hearth-tax,
horn-geld, 49, 50 ; Assessed
taxes, 1785, 58 ; Brig-bote, 49 ;
Burg-bote 49 ; Cards, tax on,
first introduced during reign of
Charles I ; Carucage — A medi-
eval tax levied on land at so
much a carucate, i.e., the
quantity of land that could be
ploughed by one plough in a
season; Customs (1154-1688),
55, 59 ; Consolidated Fund,
1787, 137; "Dane-geld," 50;
Estate duties, 59 ; Excess
profits, 13, 16, 18, 59; Excise,
58 ; Fumage, 59 ; Fund,

consolidated, 137 ; Hearth-
money, 50, 57, 59 ; Here-geld,
49 ; House duty, 59 ; Income tax
— most flexible, 13 ; first levied
by I^chard I, 59 ; first levied
in modern form by Pitt in 1799,
75, discontinued at close French
Wars, re-introduced in 1843,
123 ; Indirect, unknown until
1643, 58 ; Jews, 57 ; Land
taxes, 57, 59 ; Land-value
duties, 59 ; Licences, 51 ; Laws
in re must originate in Com-
mons ; Long Parliament
methods, 58 ; Marriages, births
and deaths ; Methods in 1817-
1914, 122 ; Moneyage — A form
of hearth money originating in
Anglo-Saxon times — " by way
of bounty or recompense to the
King, not to alter or debase the
coin," abolished by Henry I ;
Monthly assessments, 58 ; Ori-
gin of present-day taxes, 58 ;
Personal property, 57 ; Poll-
taxes, 57. 71 ; Post Office. 17,
59 ; Pre-emption, 54 ; Property
and income, 59 ; Scutage, pur-
pose for which it could be
levied, 57 ; Ship-geld, 50 ;
Stamp duties first imposed in
1671, 59 ; Subsidy — customs,
55 ; tax, 56 ; Tenths and
Fifteenths, 57 ; Transfers of
Stocks, 17 ; Trinoda necessitas,
49 ; Of war wealth, 17 ; 1914-
1920, principle upon which
based, 12 ; Tenths and
Fifteenths, 57

Tonnage Act — 1694, Bank of
England organized under, 157

Trade, physical volume change,
1913-1919, 43

Treasurer — Norman times, 47

Treasury, PubUc, 23, 47, 133, 135

Bills, 8, 11, 75, 185— See

Debt — national

Notes, also called Currency

Notes, Bradbury's, 6 ; Out-
standing, 31st Dec, 1919, 25,
41

Trinoda necessitas, 49

Tudor period, control of the

crown lost by the people, 67
Tunnage and poundage, 56 — See

Customs

INDEX AND GLOSSARY

207

Ufficio di San Giorgio, 154
Union of South Africa, cost of war,

1914-1919, 1
United Kingdom, cost of war to,

1914-1919, 1
Usury — See Interest. 1 50

Venice, Bank of. Character of

business, 154
" Vote " — English treasury term

for appropriation, 141

Walpole, Robert, Chancellor of
Exchequer, 101

War : American banks, how they
helped finance world war, 33 ;
Boer war, 30, 112; Debts
caused by war, 79 ; Crimean
war, 112 ; Cost cumulative,
119; Comparison, 1688 to 1817,
81, 118; Debts, 19; 1688-
1817, 81 ; Expenditures, 1914-
1920, 12, 14, 15; Income,
1914-1920, 14 ; Dutch, 72 ;
French, the Great, 31, financing
described, 108-117; Greatest
cause of public debt and
expenditure, 76

1914-1920— Summary, 1-3 ;

Banks' part in financing, 33 ;
Six years of war v. 2\ centuries,
1, 13 ; Conditions in July,
1914, 4 ; Emergency measures.

1914, 5— currency notes, 6 ;
clearing house certificates, 7 ;
moratorium, 1914, 7 ; protect-
ing acceptance market, 7 ;
treasury bills issued, 8 ; stock
exchange loans, 9 ; advances
to exporters, 9 ; cotton trade
financing, 10 ; success attend-
ing these efforts, 10 ; Costs and
how met, 11, 30, per cent, from
tax, 2, per cent, from borrow-
ing, 2 ; Credit structure and
the banks— Table I, National
debt V. bank assets, 40 ; II,
curency and deposits, 42 ; III,
specie reserves, 44 ; War Loans,
how financed, 34 ; Loans to
Dominions and Allies, 31st
March, 1920— Table, 29

Ways and means advances : War
Debt, 1914-1920, 19, 36, 39

Wealth, War, taxation of, 16

, National, 1914 and 1920,

3 ; 1688-1817— See table, 81 ;
1817-1914, 127, 128

WUliam I, 67

Ill, coinage restored, 61,

65 ; First loans, 84 ; Grant for
Ufe denied, 48 ; Dutch financial
experience an asset, 74 ; Fi-
nance (pubUc), in reign, 80 ;
Lottery loan, 93 ; National
debt and Bank of England
originate in his reign, 74. 75

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Full text of "English public finance from the revolution of 1688. With chapters on the Bank of England"

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