The Management of the National Debt of the United Kingdom 1900-1932

Jeremy Wormell

• Publisher: Routledge
• Year: 2002
• ISBN:
  9781134604067
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Negocios en general

This impressive and pioneering work describes and analyses the management of the national debt of the United Kingdom from the Boer War (1899-1902) to the period of the Great Depression in the early 1930s. It therefore spans the expansion of the debt during the Great War of 1914-18 and the struggle to bring its structure and cost under control in the decade and a half following Armistice.
The Management of the National Debt in the United Kingdom is the first definitive work on the subject. Using an impressive array of research, from archives and unpublished material, Jeremy Wormell has brought together material that is unavailable in any other form. It will be an invaluable resource for political and economic historians, as well as economists in general, civil servants, bankers and financial journalists.

Part I

The foundations of the twentieth-century debt

1 Sinking funds, annuities and savings banks

The present Parliament cannot of course bind the next Parliament…But what this Parliament can do is, to make things easier for those who hereafter desire to conserve the Sinking Fund, and to place difficulties in the way of those who may desire to make an onslaught on it. The Sinking Fund, no doubt, requires to be handled at all times with great care and delicacy. If it is overdone it may be undone. To ask taxpayers to make an undue sacrifice is to endanger its existence.

Sir Edward Hamilton, ‘The Sinking Fund’,

30 September 1897, T 168/86

The British government borrowed little in the forty-three years that lay between the end of the Crimean War in the spring of 1856 and the start of the South African War in the autumn of 1899. Although the Treasury was squeezed by social and military spending in the final two decades, budgets habitually produced surpluses and, without undue exaggeration, the administration of the National Debt was, as in Sir Edward Hamilton’s story of the origins of George Goschen’s 2 ½–2 ¾ per cent Consols, a question of ‘conversion and redemption’:¹ conversion to lower interest rates and repayment. Mingled with the repayments came temporary borrowings to pay for colonial and imperial wars, but these were not so great as to demand innovation. When new instruments came, it was advances for capital investment by local bodies and central government departments that gave the stimulus: Exchequer Bonds, Treasury Bills and advances from the savings banks to pay for military works, telephones and government buildings.

Much of the administrative machinery, the system of repayment, the securities and the attitudes of officials passed unchanged into the twentieth century and, indeed, in some cases, into the present day. This chapter sets the scene by describing the Victorian institutions and orthodoxies: the arrangements for managing the Debt; the sinking funds and the statutory structures which protected them from political interference; the role of the National Debt Commissioners (the Commissioners) and the savings bank funds; and the characteristics of the securities. The next chapter chronicles the borrowing that accompanied the South African War and then shows where the Edwardian Treasury departed from the arrangements of the previous century to lengthen or repay the new debt which had been incurred.

Debt repayment: sinking funds and annuities

The Treasury had no general borrowing powers until 1914, and legislation was required each time a new issue or conversion offer was contemplated. Two marketable instruments—Exchequer Bonds and Treasury Bills—were governed by statute and Treasury Minutes (TMs), but these did not give the Treasury the power to borrow: they merely prescribed the methods of issue and administration. Legislation enabling the Treasury to make advances for public works might give it power to borrow on Exchequer Bonds, Treasury Bills or Exchequer Bills. Legislation sanctioning expenditure on naval or military works might specify the same instruments, although latterly it became usual for this kind of spending to be met from annuities sold to the funds administered by the Commissioners. The approval of expenditure on wars would be accompanied by the power to borrow, and the legislation sanctioning Goschen’s conversion included authority to borrow to pay off dissentients. The discretion given to the Treasury varied. Legislation always specified the maximum amount that could be borrowed and the duration of the authority. If it specified Exchequer Bonds, it would usually prescribe the length and the maximum rate of interest. After 1875, the legislation would also state whether the interest was to be met from the Permanent Charge.

The Permanent Charge, Sir Stafford Northcote’s machinery for repaying debt, was introduced to supplement a system of repayment by annuities, which were included in the budget as expenditure, and the application of unforecast, or ‘casual’, budget surpluses. The annuities were administered by the Commissioners, or the Commissioners for the Reduction of the National Debt, to give them their full title. This body had been established in 1786^a to receive and apply sinking fund monies. In the late nineteenth century, it administered the assets of nineteen other funds, of which the most important were those of the Post Office Savings Bank (POSB) and Trustee Savings Banks (TSBs). The Commissioners were the Speaker, the Chancellor of the Exchequer, the Master of the Rolls, the Accountant-General of the Court of Chancery and the Governor and Deputy-Governor of the Bank of England. The Chief Baron of the Exchequer was added in 1808.^b The Lord Chief Justice replaced the Chief Baron in 1880, when his office was abolished. The office of Accountant-General was abolished in 1872, and the Paymaster-General of the Court of Chancery became a Commissioner.^c Although three Commissioners were needed to form a quorum, in practice day-to-day business was performed by the Comptroller-General under the direction of the Chancellor and his Treasury officials.² In 1899, the Comptroller-General was George Hervey.

Repayment of debt by means of annuities took two forms. The general public could buy annuities from the Commissioners, using either securities, or money, which was used to buy securities. The arrangements had altered over the years, but by the end of the century they were mainly regulated by the Government Annuities Act 1829 and the National Debt (Supplemental) Act 1888. These gave the Commissioners the power to sell annuities for a term of years, or on single lives, two lives and the life of the survivor, or on the joint continuance of two lives. The annuities could be either immediate or deferred. As with all annuities, the value was determined by the yield on securities and the mortality tables, with the Treasury having powers to adjust the rates. When investors purchased annuities, the securities that were surrendered, or bought with their money, were cancelled and the annuity became a liability of the Consolidated Fund. Because the capital, as well as the interest, was being paid to the annuitant, the annual cost to the Consolidated Fund was greater than the annual interest on the securities that had been cancelled. On the other hand, when the annuity ceased, the debt had been written off and the National Debt reduced. Annuities were thus a disguised sinking fund.³

As well as being a method of repaying debt, annuities were intended to be a service to the public, enabling a secure pension to be bought with a capital sum. Despite the intention, they were not popular. They were not marketable: the return of capital over a period meant that annuitants had the problem of continuously receiving principal and finding a suitable new investment; they were unsuitable for trustees; and the entire annuity was at that time treated by the Inland Revenue as income and liable to tax, despite a proportion being a return of capital.⁴

More important than the annuities sold to the public were Terminable Annuities, or ‘departmental’ annuities, which were held by the funds under the control of the Treasury. The largest were those of the savings banks, whose deposits were invested by the Commissioners in Parliamentary Securities once a balance had been put aside to ensure that sufficient funds were kept liquid to meet withdrawals.^d As the Consolidated Fund was the ultimate guarantor of the interest and capital, the Treasury felt justified in investing part of the funds in illiquid securities. It was this combination of the State as borrower and lender which was used by William Gladstone in 1863, when Chancellor of the Exchequer, to extend the principle of annuities,^e which were proving difficult to sell to the general investor.⁵

As with annuities bought by the public, Gladstone’s system required the surrender of securities for cancellation. In return, the Consolidated Fund paid the Commissioners an annual sum for a specified number of years. This was calculated to produce an amount equal to the interest the Commissioners would have received on the cancelled securities, together with enough money to replace them, or to provide their equivalent in other government securities or in cash. The calculations were periodically tested to ensure that the securities would be exactly replaced, despite movements in market prices, and, if necessary, adjustments were made to the annual payments. The funds were thus left in an unchanged position when the annuity expired.

Until 1883, the system had only been applied to the funds of the savings banks, but the Court of Chancery (Funds) Act 1872 also made the Consolidated Fund responsible to the suitors of the Court of Chancery for all monies and securities held in Court. This allowed the principle to be extended. In 1884, the Chancery Funds Annuity was set up, £40m of Consols being cancelled in return for an annuity of twenty years. Because the cancelled securities actually belonged to the suitors, rather than being assets held as machinery against a liability, the securities to be replaced had to be Consols.⁶

There were two minor annuities that were payable to funds under government control, but differing from other Terminable Annuities by being wholly a return of capital. They were the Trustee Savings Bank Deficiency Annuity, set up in 1881 to make good a deficiency in the capital of the TSBs, and the Sinking Fund Annuity, set up in 1884 to extinguish an increase in the nominal value of the Debt arising from a conversion scheme. Finally, there was an annuity which fell into neither category. The Red Sea and Telegraph Annuity resulted from a government guarantee given to a company which was to lay a telegraph line between Britain and India. When the company went bankrupt, the Treasury met its guarantee by setting up an annuity in favour of the shareholders. It was due to expire in 1908.

Northcote’s mechanism for repaying debt was called the ‘New Sinking Fund’, to contrast it with the ‘Old Sinking Fund’ that came from casual surpluses. The principle of the New Sinking Fund was that a specific sum of money—known variously as the Permanent Annual Charge, Fixed Debt Charge, Fixed Charge or just ‘the Charge’—was made available each year to service the Debt. To give protection against encroachments by needy Chancellors, it was included in the budget as an item of expenditure, that is the casual surpluses (or deficits) were struck after the Fixed Charge had been met. From the Charge was met the expenses of management, the interest on both the funded and unfunded debt and the capital and interest on annuities. The balance between the Fixed Charge and the cost of interest and management, the New Sinking Fund, was used to repay debt, the monies growing each year as the interest saved on repaid debt was used to repay more debt. Cash was issued to the Commissioners, who had to spend it within six months on buying in, paying off or redeeming debt, other than Ways and Means or Deficiency Advances (see pp. 20–1). If this last condition had not been included, the sinking fund monies could have been used to repay temporary borrowing, which, when repaid, would have left Exchequer balances at a higher level. They would then have been available to meet expenditure. The same Act directed that the casual sur...