LIBRARY 
 
 OF THK 
 
 UNIVERSITY OF CALIFORNIA, 
 
 OIRT OH 
 
 Class 
 
 m 
 
 I 
 
 m 
 
SINKING FUNDS. 
 
 A DISSERTATION PRESENTED TO THE BOARD OF UNIVERSITY STUDIES 
 
 OF THE JOHNS HOPKINS UNIVERSITY FOR THE 
 
 DEGREE OF DOCTOR OF PHILOSOPHY. 
 
 BY 
 
 EDWARD ALSWORTH ROSS, 
 
 Associate Professor of Political Economy and Finance, Cornell University. 
 
 BALTIMORE, 1892. 
 
Sinking; Funds. 
 
SINKING FUNDS. 
 
 A DISSERTATION PRESENTED TO THE BOARD OF UNIVERSITY STUDIES OF THE 
 
 JOHNS HOPKINS UNIVERSITY FOR THE DEGREE OF DOCTOR OF 
 
 PHILOSOPHY. 
 
 EDWARD A. EOSS, Ph. D., 
 
 Associate Professor of Political Economy and Finance in Cornell University. 
 
II I . 1 
 
 A 
 
 COPYRIGHT, 1892, BY AMERICAN ECONOMIC ASSOCIATION. 
 
 BALTIMORE: 
 
 FROM THE PRESS OF GUGGENHEIMER, WEIL, & Co. 
 l&B. 
 
TABLE OF CONTENTS. 
 
 PAGE. 
 
 INTRODUCTION 7 
 
 I. ENGLISH AMORTIZATION 9 
 
 The Wai pole-Stanhope Sinking Fund 9 
 
 The Theories of Dr. Price 12 
 
 Pitt s Sinking Fund 14 
 
 Decay of the Old System 16 
 
 "The Old Sinking Fund." 18 
 
 " The New Sinking Fund." 19 
 
 Terminable Annuities 20 
 
 II. AMERICAN AMORTIZATION 21 
 
 Redemption of Paper Money 21 
 
 Loans 24 
 
 Plan of Robert Morris 25 
 
 Efforts to Provide for the Debt 26 
 
 Foreign Loans 29 
 
 Summary 30 
 
 The New Government 30 
 
 The Report on the Public Credit 31 
 
 The Funding Act 34 
 
 The Sinking Fund of 1790 36 
 
 Early Operations on the Debt 37 
 
 Changes Made by the Law of 1792 41 
 
 Complications 44 
 
 The Sinking Fund of 1795 48 
 
 The Sinking Fund of 1802 63 
 
 The Sinking Fund during the War 68 
 
 Reorganization 70 
 
 The Sinking Fund of 1817 73 
 
 Debt Payment between 1837 and 1862 76 
 
 The Sinking Fund of 1862 79 
 
 Liberal Interpretation 82 
 
 Conclusions 84 
 
 III. THE THEORY OF AMORTIZATION 86 
 
 Our Theory Concerned with Settled Policy 86 
 
 The Meaning of the Term " Sinking Fund." 87 
 
 99730 
 
Table of Contents. [31 G 
 
 PAGE 
 
 Contingent Amortization 89 
 
 Uniform Amortization 91 
 
 Effect of Amortization in a Borrowing Period 92 
 
 When Suspension is not Necessary 93 
 
 Forms of Uniform Amortization 94 
 
 Progressive Amortization 96 
 
 Proportional Amortization 101 
 
 Variations from the Type 102 
 
 Tendency to Uniform Treatment of a Public Debt 103 
 
 Suspension of Amortization 103 
 
 What is the Best Mode of Amortization? 104 
 
INTRODUCTION. 
 
 To understand the nature and workings of the 
 device known as the sinking fund, we must study 
 it as it appears in the financial history of England 
 and of the United States. In the former we have 
 exemplified all the financial mistakes to which a 
 wrong theory of amortization can give rise; in the 
 latter we discover the slow emergence of certain 
 ultimate forms of amortization, on which both expe 
 rience and scientific analysis set the seal of approval. 
 Both taken together furnish ample basis for a theo 
 retical treatment of the payment of public debts. 
 The study then falls under the three heads: English 
 Amortization, American Amortization, The Theory 
 of Amortization. 
 
UNIVERSITY 
 
 OF 
 
 SINKING FUNDS, 
 
 I. 
 
 ENGLISH AMORTIZATION. 
 The Walpole-Stanliope Sinking Fund. 
 
 The permanent funded English debt began in 
 1694, when twelve million pounds were borrowed 
 from the Bank of England in consideration of its 
 charter. During the Dutch wars the debt rapidly 
 grew until, in 1716, it amounted to forty millions. 
 The various loans making up the debt were based on 
 the pledging or mortgaging of specific taxes, or reve 
 nues. Loans thus guaranteed were said to be 
 "funded." The interest of each loan was provided 
 for by a particular tax pledged for a term of years, 
 while the principal was to be discharged, either by 
 the regular excess payment of an annuity, or by the 
 varying surplus yielded by the tax. By this "fund 
 ing" policy the public debt came to consist of many 
 small loans, each bottomed on its own petty item of 
 revenue. This complicated and rigid system, wherein 
 the growth of one source of income could not be used 
 to eke out the shrinkage of another, proved unfit for 
 a growing public finance. In 1716, the many little 
 items of revenue, mortgaged to some particular debt, 
 were grouped together into four large funds, the 
 Aggregate, South Sea, General, and Sinking funds. 
 
10 Sinking Funds. [320 
 
 The first three were composed of permanent taxes, 
 and secured the interest on three great blocks of 
 public debt. The fourth was made up of the surpluses 
 of the first three left over after satisfying all charges 
 upon them, and was called the "Sinking Fund," 
 because it was appropriated to the sinking of the 
 national debt, "and to no other purpose." As it was to 
 be invariably applied to interest-bearing debt, the 
 fund was sure to show a steady growth. For as its 
 yearly income operated in extinguishing the debt, 
 the interest thereby disengaged went, of course, to 
 swell the surpluses that made up the sinking fund; 
 so that this fund grew in geometrical ratio, just as if 
 it had enjoyed the right, granted to later sinking 
 funds, of receiving interest on all debt redeemed 
 by it. 
 
 For a while this permanent appropriation, know r n 
 as the Walpole Stanhope sinking fund, was a national 
 pet, and ministers met deficits by new loans rather 
 than check the growth of the infant. Even during 
 borrowing periods the fund served the purpose of 
 lulling the people into the belief that the national 
 debt was being swiftly and surely extinguished. In 
 1727 the interest on the public debt was reduced from 
 five per cent, to four, thus adding four hundred 
 thousand pounds to the three surpluses that together 
 constituted the sinking fund. But from this time on 
 gradual encroachments were made by charging with 
 the interest of new loans the fund that had been 
 solemnly set aside for paying the principal of the 
 public debt. In 1733, Walpole needing half a million 
 for current expenses, broke into the fund this time, 
 taking not merely the interest of the sum he wanted, 
 but the sum itself. The next year the whole yield 
 
321] Sinking Funds. 11 
 
 of the fund was diverted from its purpose, and the 
 two following years it was anticipated and mortgaged. 
 In 1737 and 1738 the national debt was reduced three 
 millions by the income of the fund. During the fol 
 lowing twelve years it was seized for the use of the 
 government. In 1749 another refunding of the debt 
 at lower interest added six hundred thousand annually 
 to the fund, but not more than three millions of debt 
 were extinguished by it in six years of peace. 
 
 In 1752 the sinking fund underwent a change. 
 The war of 1740- ? 48 had called for loans to the extent 
 of thirty-two millions, and for the funding of these a 
 great variety of new taxes had been imposed. These 
 new taxes, now, together .with the new debt, were 
 carried into the sinking fund. That permanent 
 appropriation, which formerly had been made up of 
 specified surpluses and applied to the principal of the 
 debt, was now enlarged by taxes and charged with 
 the interest of new loans. In a word, its original 
 character of sinking fund was utterly obscured. Thus 
 inflated, the income of the fund averaged two and 
 one-half millions a year till the outbreak of the Rev 
 olutionary war. The total decrease in the British 
 debt for twelve years was, however, but a trifle over 
 this sum. During the war England borrowed heavily, 
 so that at the accession of Pitt in 1784, the debt 
 reached the figure of two hundred and forty-five 
 millions. One of Pitt s first reforms was to lump 
 together the revenues distributed among the four 
 permanent funds into a consolidated fund," and to 
 hypothecate this fund to the public creditors. This 
 was the origin of British "consols. He next 
 addressed himself to maturing a plan for extinguish 
 ing a debt which was then exciting general alarm. 
 
12 Sinking Funds. [322 
 
 The Theories of Dr. Price. 
 
 In 1772, Dr. Price, an eminent clergyman, and a 
 closet financier, published an "Appeal to the Public 
 on the Subject of the National Debt," which was 
 widely read by an anxious public. In this book Dr. 
 Price advanced much ingenious calculation and rea 
 soning to show the magical effect of a permanent 
 sinking fund. By this he meant that a certain sum 
 should be annually set aside for the extinguishment 
 of the national debt. This sum should be used in 
 buying public stock in the market at the current 
 prices, and the interest accruing on the stock thus 
 bought should be invariably used in still further 
 increasing the purchases. In this manner a fund 
 would be formed, which would grow by compound 
 interest and, if maintained inviolate, would, in time, 
 absorb a debt of any size, at but little expense to the 
 nation. However small the original annual appro 
 priations might be, they would be in this plan 
 invested at compound interest, and would need only 
 time to cancel any debt. 
 
 The efficacy of the scheme, Price insisted, lay in 
 keeping up the annual payments in war as well as in 
 peace, in times of deficit as well as in times of sur 
 plus. According to him it is perfecUy proper to bor 
 row money to maintain the appropriations, inasmuch 
 as the sums borrowed are obtained at simple interest 
 and invested in government stocks at compound 
 interest. With a high rate of interest the fund 
 increases only the more swiftly, and hence it is 
 sound policy to create new debt at a high rate of 
 interest, in order to buy in old debt at a low rate. 
 Indeed, a debt at a high rate of interest, with a sink 
 ing fund attachment will be discharged more 
 
323] Sinking Funds. 13 
 
 quickly than the same debt with the same sinking 
 fund, at a lower rate. "A state may without diffi- 
 culy redeem all its debts by borrowing money at an 
 equal or even higher interest than the debts bear; 
 and without providing any other funds than such 
 small ones, as shall from year to year become neces 
 sary to pay the interest of the sums borrowed." The 
 magical efficacy of the compound interest principle 
 is illustrated by the fact that a penny, put at five 
 per cent, compound interest in the year 1, would in 
 1775 amount to three hundred millions of earths, 
 all solid gold. But at simple interest the penny 
 would amount to seven shillings and six pence! 
 Hence the importance of never interrupting the 
 operations of the sinking fund. "All governments 
 that alienate funds destined for reimbursement 
 choose to improve money in the last rather than the 
 first of these ways." 
 
 It is not necessary to open up the theory of amor 
 tization here, in order to expose fallacies that time 
 has already exploded. Let it suffice to say that the 
 chief and central misconception of Dr. Price was in 
 regarding government stocks as productive property. 
 It was this that led him to look upon the interest on 
 stocks bought in for the sinking tund as "earnings," 
 and not as the proceeds of taxation. It was this that 
 prevented him from seeing that the magical reduction 
 effected by a small annual appropriation is due to 
 the fact, that for many years the nation enjoys no 
 easement from its operations on its debt, but con 
 tinues to pay fictitious interest upon portions of its 
 debt bought up and thus already practically redeemed. 
 After all, the national debt is extinguished by taxa- 
 
14 Sinking Fund*. [324 
 
 tion. But in Price s scheme taxes are paid over not 
 as reimbursement, but as interest on defunct stock. 
 
 Pitt s Sinking Fund. 
 
 The theories of Price, though clearly refuted by a 
 few obscure writers, were widely accepted, and when 
 Pitt resolved upon the reduction of the national debt, 
 he adopted them as the basis of his system. In 1786, 
 at a time when the recent doubling of the national 
 debt caused general alarm, Pitt found himself with a 
 clear surplus of nine hundred thousand pounds. This 
 surplus raised by additional taxes to a million, he pro 
 posed to constitute a permanent sinking fund appro 
 priation. Following the advice of Dr. Price, he deter 
 mined to put his fund beyond the clutch of needy 
 finance ministers by. turning it over to a special 
 branch of administration. The yearly appropriation 
 was to be vested in a "Board of Commissioners of the 
 Sinking Fund," and by them applied quarterly to the 
 purchase of public stocks, at or below par. The treas 
 ury was to pay interest on this stock just as it would 
 on any other outstanding stock, and this interest, 
 together with all temporary annuities that should fall 
 in, was to be applied quarterly, in the same manner as 
 the original appropriations. These quarterly pur 
 chases prevented the accumulation, in the hands of 
 the commissioners, of a sum large enough to tempt 
 the cupidity of a finance minister, while their regu 
 larity made it impossible so to cook the accounts of 
 the board, as to conceal any invasion of the fund. 
 
 The yearly payment w^as to be one million pounds. 
 When this should be increased by lapsed annuities 
 and by the annual interest on stock constituting the 
 sinking fund to four millions, it was to be at the dis- 
 
325] Sinking Funds. 15 
 
 posal of Parliament. Until then the payment on 
 behalf of the sinking* fund took precedence of every 
 thing except the interest on the public debt, and 
 could not be withheld except by an act of repeal, 
 passed in full view of the public. When Fox objected 
 to a plan that would tie up so much of the national 
 income, even in time of war, he was told that the 
 essence of the scheme was to keep the sinking fund 
 sacred, and that any diversion of the fund would 
 prove its ruin. He succeeded, however, in getting 
 a clause inserted, authorizing the commissioners of 
 the sinking fund to accept as much of any new loan 
 as they should have the money to pay for. Strange 
 to say, this clause, which permitted the government 
 to borrow back its payments to the sinking fund, 
 and which made useless all the safeguards thrown 
 about the fund to secure its inviolability, was 
 heartily commended by Pitt. Still stranger is it, 
 that this wise clause was never acted upon in raising 
 any of the great war loans, but was first followed in 
 1819, in a time of peace. 1 
 
 After brief debate this plan passed Parliament 
 with no dissenting voice, and received the royal 
 approval amid general congratulation and enthusiasm. 
 "Never was the admiration of any public measure 
 more warm and general, and never was there fuller 
 confidence in the soundness of the principles upon 
 which it was founded. " ; Huskisson declared Pitt s 
 sinking fund perhaps the proudest monument raised 
 by the virtues and the genius of Mr. Pitt, to his own 
 fair name, and one that should be preserved unmuti- 
 lated and entire, in all the strength and symmetry of 
 
 lr romlme s "Life of Pitt," pp. 164-167. 
 2 Tomline, p. 164. 
 
16 Sinking Funds. [326 
 
 proportion assigned to it by the hands of its immortal 
 author." Tomline thinks that Pitt s inviolable sink 
 ing fund "probably saved this country from becom 
 ing a province of France." 
 
 In 1792, Pitt s system was supplemented by an act 
 establishing an accumulating sinking fund of one 
 per cent, on the nominal capital of all loans. By this 
 means every debt was at its creation to be "put in 
 course of liquidation. - This principle was abandoned 
 for new loans in 1798 and the following years, and 
 eighty-six millions of debt were created without a 
 one per cent, sinking fund. In 1802, however, this 
 principle was again revived and adhered to for a 
 number of years. 
 
 At first Pitt s sinking fund was an honest one 
 and rested on a clear surplus. But in 1793 the war 
 with France began, and for a very long period Eng 
 land s balance sheet showed no surplus, but only 
 huge deficits. In this new situation amortization 
 would have been suspended, if sound doctrine had 
 been abroad. But under the influence of Dr. Price s 
 theories, Parliament continued for many years 
 enlarging and strengthening the sinking fund, till in 
 1813 sixteen million pounds were used in reducing 
 old debt. About this time most of the stock bought 
 up and held by the commissioners of the sinking 
 fund was cancelled, thus reducing the annual fund 
 by about six millions of interest. 
 
 Decay of the Old System. 
 
 In 1813, Professor Hamilton, of Aberdeen, pub 
 lished a book on the British debt, which marked an 
 epoch in the growth of financial theory. In this he 
 reviewed, one by one, the reasonings of Dr. Price, 
 
327] Sinking Funds. 17 
 
 and laid the finger of criticism on the weak spot in 
 each. He pronounced all schemes for wiping out the 
 public debt by sinking funds operating by compound 
 interest, illusory. The excess of revenue above 
 expenditure, he maintained, is the only real sinking 
 fund by which public debt can be discharged. Amor 
 tization during borrowing periods is a purely fictitious 
 operation which in no wise reduces debt, but really 
 adds to it. 
 
 With the publication of these ideas the old notions, 
 which led a minister to declare that the sinking fund 
 was "an advantage gained by nothing," began to 
 disappear. Great inroads began to be made in the 
 old system. The Parliament of 1819 thought it 
 necessary that there should be a yearly surplus of 
 income of five millions for the purpose of the sinking 
 fund. In 1823 the sinking fund was cut down to 
 five millions, though the practice of keeping the 
 stock redeemed, in the hands of commissioners, was 
 still retained. In 1828 the old system lost whatever 
 shred of credit it still possessed by the appearance of 
 Lord Grenville s "Essay on the Supposed Advantages 
 of a Sinking Fund." In this essay one of the former 
 ardent champions of Pitt s policy renounced his 
 former belief in it, and recanted his error in a for 
 midable exposure of the old fallacies. 
 
 In the same year a parliamentary committee esti 
 mated that as a net result of the sinking fund system 
 kept up during war, the nation had, between 1785 
 and 1829, borrowed 330,000,000 at about 5 per cent, 
 interest, in order to pay a debt of the same magni 
 tude at 4^- per cent, interest. This policy, by which 
 a debt at 4-J per cent, was converted into one at 5 per 
 cent., meant an annual loss in interest of 1,627,765 
 2 
 
18 Sinking Funds. [328 
 
 extending over forty-three years. This was the 
 conclusion arrived at without taking into account 
 the cost of administering the sinking fund, or the 
 depreciation of the public stock caused by the custom 
 of borrowing sums much larger than were required 
 for national expenses. 
 
 In consequence of these results the finance com 
 mittee denounced a sinking fund fed by loans, and 
 laid down the axiom that funds for the extinction of 
 debt should not be raised by the creation of it in 
 another shape. It held that the only fund that can 
 advantageously be used for sinking is the net surplus 
 of receipts over expenditures. Hence, instead of fix 
 ing in advance the sum to be applied to the principal 
 of the public debt, it was better to appropriate only 
 the net annual surplus, whatever it might be. In 
 view of the size of the debt at that time, it was 
 thought desirable that there should be provided a 
 yearly surplus of three millions. But in case this 
 excess should not be realized, it would not therefore 
 be wise to resort to borrowing in behalf of amortiza 
 tion. Whatever stock was redeemed was to be 
 promptly cancelled and interest was to be no longer 
 reckoned on defunct paper. 
 
 "The Old Sinking Fund." 
 
 The next year the recommendations of the com 
 mittee were practically followed. It was enacted 
 that the formal sinking fund be abolished; that in 
 place of it any surplus, as it was realized, should be 
 applied quarterly to the redemption of the debt; and 
 that money should on no account be borrowed for 
 the fund. The stocks then standing to the credit of 
 the sinking fund were to be destroyed, and interest 
 
329] Sinking Funds. 19 
 
 on them was to cease. The new fund was to redeem 
 annuities, exchequer bills, or other non-interest- 
 bearing debt, as well as consols. For these purposes 
 the Chancellor of the Exchequer was to secure, if 
 possible, a surplus of three millions a year. 
 
 The extremely simple plan of amortization adopted 
 at this time remained for many years the only provi 
 sion for the payment of the British debt. It was not 
 found, however, to favor any energetic and effective 
 reduction. The intended surplus of three millions 
 was never realized after 1829. A succession of lan 
 guid and popularity-seeking ministers preferred the 
 remission of taxes, or an expensive foreign policy, 
 to the payment of the debt. In 1857 a regular sink 
 ing fund was established, but as it soon necessitated 
 the old practice of borrowing in order to pay debt, 
 it was abandoned. 
 
 "The New Sinking Fund." 
 
 In 1875, impressed with the duty of energetically 
 reducing her debt, England sought to make more 
 effective provision for amortization. As the old 
 extra-budgetary provision had failed, it was thought 
 necessary to bring the principal of the debt again 
 within the field of regular appropriation. Instead of 
 being put off with the "leavings," the sinking fund 
 was to come within the accounts as an ordinary 
 expenditure, the surplus or deficiency of the year 
 being reckoned, only after it had been included. 
 
 Instead of reverting to the old method of paying 
 interest to the sinking fund on all debt redeemed, the 
 simple American plan of a combined fund was intro 
 duced. A fixed sum larger than the interest charge 
 of the debt was permanently appropriated. The 
 
20 Sinking Funds. [330 
 
 excess was for payment of the debt. As each year 
 the interest charge shrunk, the surplus for amortiza 
 tion was correspondingly enlarged. This provision, 
 known as "The New Sinking Fund," is still in force. 
 The former appropriation of the annual surplus re 
 mains under the title of "The Old Sinking Fund." In 
 In addition to these there are five small especial 
 sinking funds 1 concerned with outlying portions of the 
 British debt. 
 
 Terminable Annuities. 
 
 Besides these devices England has been reducing 
 her debt by the use of terminable annuities. Formerly 
 these were sold to raise money or given to lenders 
 as a bounty. Later it was discovered, that by con 
 verting blocks of the public debt into this form of 
 obligation, a system of regular debt reduction could 
 be maintained, when otherwise impracticable. By 
 this process a portion of stock is cancelled, and in 
 place of it an annuity which includes both interest 
 and reimbursement, is issued to run for a term of 
 years. Once the conversion is accomplished, the 
 amortization becomes perfectly automatic, and must 
 be maintained in deficit years as well as in surplus 
 years. Under this system later English chancellors 
 have been able to make large reductions in the pub 
 lic debt. 
 
 Buxton s "Finance and Politics," Vol. II, p. 217, note. 
 
II. 
 
 AMERICAN AMORTIZATION. 
 
 Redemption of Paper Money. 
 
 The problems of debt payment first met our gov 
 ernment early in the Revolution. At the outset of 
 the war the Second Continental Congress, afraid to 
 tax and unable to borrow, resorted to a favorite col 
 onial expedient and paid the expenses of the war by 
 issuing bills of credit resting on the faith of the con 
 federate colonies. These promises to pay were to be 
 redeemed by the several colonies, the whole being 
 apportioned among them in proportion to population. 
 Each colony was to secure its quota of bills as it saw 
 fit, and pay them into the general treasury in four 
 equal annual instalments, beginning in 1779. If any 
 colony could not secure its quota of continental bills 
 by taking them for taxes, or by exchanging its own 
 notes for them, it might make up the amount in 
 specie. Such specie as should thus be paid in was to 
 be retained by the continental treasurer to redeem 
 such outstanding bills as should be presented directly 
 to him. With these provisions for redemption Con 
 gress, in July, 1775, ventured to issue three millions 
 of paper money. 
 
 Before the end of the year four more millions were 
 issued, and each colony was directed 1 to provide ways 
 and means of sinking its proportion of bills in the 
 
 1 December 26, 1775. 
 
22 linking Funds. [332 
 
 most effective manner. The redeemed bills were to 
 be cancelled and paid in, in four instalments, begin 
 ning in 1783, when the former instalments ceased. 
 The large emissions of 1776 so depreciated the paper 
 money, that in 1777 we find Congress again anxiously 
 urging the colonies to do something to redeem their 
 quotas. 
 
 Later on it was seen that a great war debt like the 
 continental currency could not be paid by ordinary 
 taxes, and there was talk of recurring to the nearly 
 obsolete English practice of charging the debt on 
 special taxes, or on specific sources of permanent 
 income. In reference to the several issues of bills, a 
 report of the board of treasury on January 2. 1779, 
 declared it -necessary to ascertain the period of their 
 redemption and seasonably to establish funds, which 
 in due time shall make adequate provision for the 
 same." 
 
 Thereupon Congress resolved that the states be 
 called upon to pay in their respective quotas, of 
 fifteen millions for 1779, and six millions annually 
 for eighteen years thereafter, as a fund for sinking 
 the emissions and loans. The quotas were to be paid 
 not in state notes, but in continental bills, and these 
 were to be applied to paying the interest and princi 
 pal of the interest-bearing loans. The residue was 
 to be burned. The circular letter embodying the 
 above was followed in May by another raising the 
 amount of bills called for to sixty millions. 
 
 On March 18, 1780, Congress, after having solemnly 
 and repeatedly pledged the public faith to the full 
 redemption of the continental paper, bowed to the 
 inevitable and recognized the depreciation of its own 
 
 1 January 14. 
 
333] Sinking Funds. 23 
 
 bills. It undertook itself to redeem the old issues by 
 a new emission to be exchanged for the old at the 
 rate of one for forty. These bills were to be issued 
 on the credit of individual states, each state being 
 assigned its due quota, and were to be redeemed by 
 special state funds sufficient to retire a sixth part of 
 the bills annually. The new bills bore five per cent, 
 interest, were to be redeemed in specie, and the faith 
 of the United States was pledged for their redemption 
 in case any state failed to sink its share. 
 
 With the growth and collapse of the paper bubble 
 there began slowly to emerge the conviction that the 
 state must wield the taxing power with a strong 
 hand, and must cut deep into the resources of the 
 community, if public credit were not utterly to disap 
 pear. The resolutions of a convention held at Phila 
 delphia in August, 1780, with a view to forming a 
 closer union, show the growth of better financial 
 ideas. Resolution six urged that the credit of the 
 continental bills be sustained by all the states sink 
 ing their quotas by taxation, or by other means. 
 Resolution seven recommended that each state imme 
 diately establish funds for sinking annually at least 
 one-sixth of the bills they shall emit, the tax for 
 raising such funds to be paid the first year in specie, 
 the remaining five years in specie or in the bills to be 
 redeemed. The object was "that the credit of the 
 paper may rest upon the funds provided for their 
 redemption, as every attempt to support their credit 
 by forcing them into circulation tends to defeat the 
 purpose and to depreciate them." Thus the dream 
 of sustaining unfunded paper was dissolved. It was 
 recognized that public faith rests not on vague and 
 
2t Sinking Funds. [334 
 
 general promises, but on the setting apart of actual 
 and adequate revenues. 
 
 Despite all wise resolves, the new issues of paper 
 money soon sank to the level of the old, and in 1781 
 the whole irredeemable mass vanished from circula 
 tion and collected in the hands of speculators. Here 
 the unpaid bills were no longer a dangerous and dis 
 turbing element, and here Congress left them till a 
 more convenient season for liquidating. 
 
 Loans. 
 
 But no sooner had the currency problem in a way 
 solved itself than Congress began to* be embarrassed 
 by pressure from another quarter. During the con 
 test loans had been filled and interest-bearing certifi 
 cates issued, based on the promise of France to pay 
 in specie the interest on whatever sums could be 
 raised at home. At the close of hostilities, however, 
 France was compelled, in justice to herself, to inter 
 rupt her subsidies and loans, while, owing to the 
 disastrous career of paper money here, private capi 
 talists were unwilling to lend without the guarantee 
 of established funds. In 1781, 1 therefore, Congress, 
 after having in the previous year summarily redeemed 
 the continental currency, cast about for means to 
 meet the burden of domestic debt soon to be rolled 
 upon its shoulders by the drying up of foreign aid 
 and the difficulty of negotiating European loans. 
 On February 3, it resolved that it be recommended to 
 the several states as indispensably necessary that 
 they vest a power in Congress to levy for the use of 
 the United States an ad valorem import duty of five 
 per cent; that the moneys arising from the duty be 
 1 February 3. 
 
335] Sinking Funds. 25 
 
 appropriated to the discharge of the principal and 
 interest of the debts already contracted, or to be con 
 tracted, for the war; and that the duty be continued 
 till these debts be fully and finally discharged. 
 
 Plan of Robert Morris. 
 
 While Congress was thus vainly urging upon jeal 
 ous and suspicious states the necessity of national 
 revenues, Robert Morris, in his letter 1 of July, 1782, 
 to that body outlined a complete scheme of construc 
 tive finance. After reviewing the industrial advan 
 tages, to a new country, of borrowing over ruthless 
 taxation, and of foreign loans over domestic loans, 
 he dwelt upon the utter loss of the once stable public 
 credit. The causes were: the repudiation of the old 
 continental bills, the reluctance of the states to tax, 
 the feeble financial powers of the government, and 
 the absence of any provision for the public debt. 
 The first step in the restoration of credit is, said 
 Morris, the retirement of all outstanding continental 
 bills. The second is the funding of the public debt, 
 that is, the pledging of specific revenues to the ser 
 vice of particular loans. The scheme of paying 
 domestic interest by the proceeds of foreign loans is 
 ruinous and should be abandoned. The interest of 
 the public debt must be provided for by distinct 
 funds. These must be ample, because a deficit would 
 be disastrous, while an excess would serve to pay 
 immediately a part of the debt, and thus strengthen 
 credit. Morris thereupon proposes a five per cent, 
 tariff, a one dollar poll tax, a land tax of one dollar 
 per hundred acres, and an excise of one-eighth of a 
 dollar per gallon on distilled liquors. On each of 
 1 "Diplomatic Correspondence", Vol XII, p. 211. 
 
26 Sinking Funds. [336 
 
 these, estimated at half a million, a loan could be 
 opened payable in specie or in debt evidences of a 
 particular description. It is further proposed that 
 the casual surplus of each of these taxes should be 
 carried to a sinking fund, on the credit of which new 
 loans might be opened if necessary. The public land 
 Morris regarded as a future source of revenue, but 
 as yet not available for the existing debt. 
 
 Efforts to Provide for the Debt. 
 
 Six months later Congress, in order to induce the 
 niggardly and distrustful states to grant the power 
 to tax, passed an important resolution reported by a 
 committee headed by Hamilton. It was resolved "that 
 whenever the net produce of any funds recommended 
 by Congress and granted by the states, for funding 
 the debt already contracted or for procuring future 
 loans for the support of the war shall exceed the sum 
 requisite for paying the interest of the whole amount 
 of the national debt, which these states may owe at 
 the termination of the present war, the surplus of 
 such grants shall form a sinking fund, to be inviola 
 bly appropriated to the payment of the principal of 
 the said debt, and shall on no account be diverted to 
 any other purpose." A little later, in response to the 
 complaint and petitions of the public creditors to 
 whom no interest had been paid since March 1, 1782, 
 it was resolved that the establishment of permanent 
 and adequate funds on taxes or duties was necessary 
 for doing justice to the public creditors, for restoring 
 public credit, and for providing for the war. 
 
 The same session Congress passed an act making 
 the most ample provision in its power for the public 
 debt. The government was to be invested with the 
 
337] Sinking Funds. 27 
 
 right to levy for twenty-five years certain import 
 duties, estimated to yield about a million annually, 
 the proceeds to be applied solely to the debt of the 
 United States. As the proposed tariff still left 
 $1,500,000 of yearly interest unprovided for, Congress 
 recommended that this charge be quoted among the 
 states and raised by special taxes or revenues estab 
 lished for twenty-five years. Accompanying the 
 act was an address to the states, setting forth that 
 on January 1, 1783, the foreign debt was $7,885,085, 
 the domestic debt, $34,115,290, and the total, $42,- 
 000,375 ; the annual interest was $2,415,956, of which 
 $915,956 was to be raised by national taxation, the 
 rest by income from the states, and from the sales 
 of public lands. 
 
 This promising plan, like its predecessor, was 
 foiled by the stubborn particularism of Rhode Island. 
 But there was yet another resource. Urged by Con 
 gress, the individual states, after the war, ceded their 
 western lands, thus endowing the poverty-stricken 
 national government with a vast territorial domain. 
 As petty local jealousy and state narrowness thwarted 
 every effort to establish national revenues, Congress 
 turned to the sale of public lands as a final resource. 
 The ordinance of 1784-5 proposed that all moneys, 
 arising from the sale of land warrants, should be 
 applied to the sinking of the public debt, and to no 
 other purpose whatsoever. Although this paragraph 
 was omitted at the final stage of the ordinance, the 
 object of it was secured. In a report of February 2, 
 1786, it is admitted that the United States are in pos 
 session of "another fund," arising from the cession 
 of vacant and unappropriated land by individual 
 states. But this, as public securities are received in 
 
28 Sinking Funds. [338 
 
 payment, will bring but little specie into the treasury. 
 Being depreciated considerably below and receivable 
 at par with specie, it is to be presumed the purchas 
 ers will procure these securities for the purpose. 
 These lands may be calculated on, therefore, as a 
 fund only for the discharge of the domestic debt. 
 Thus by land sales, and by taxes of which a large 
 share was permitted to be paid in securities, the debt 
 was slowly being absorbed. 
 
 On the other hand, it was rapidly growing owing 
 to the conversion of unpaid interest into principal. 
 From 1782 to 1786 the accummulation of back inter 
 est was over six millions! 1 The only acknowledg 
 ment of this obligation was the issue of certificates 
 of interest, or " indents." These circulated freely as 
 a kind of depreciated currency, and operated the 
 same as the continental bills. When the debt was 
 funded, in 1791, the mass of these indents was over 
 thirteen millions. Only by squeezing the certificates 
 it had just given, from the pocket of the tax-payer 
 again, could Congress check the growth of the debt. 
 Of regular payment or redemption, there was none, 
 for specie was not forth-coming in sufficient quanti 
 ties, Congress only resource was repeated requisi 
 tion, which yielded very little specie. Thus, in 1781, 
 a requisition of 88,000,000 yielded only $1,486,154. 
 From November 1, 1781, till February 1, 1786, the 
 states were assessed over fifteen millions. Of this 
 they paid only $2,450,803. From November, 1784, 
 till April, 1788, only 996,448 was received from the 
 states. 
 
 Elliot 
 
339] Sinking Funds. M 
 
 Foreign Loans. 
 
 The history of foreign loans under the Confederation 
 is interesting and characteristic. By a settlement of 
 Franklin with the French court in July, 1782, it 
 appeared that the loans to the United States amounted 
 to eighteen million livres. On this sum the king 
 relinquished not only all interest till date, but all 
 interest till peace should be concluded. The princi 
 pal, with 5 per cent, interest, was payable in twelve 
 equal annual instalments, beginning three years after 
 a peace with Great Britain should be signed. Besides 
 this there was a loan of ten million livres made by 
 Holland on the security of the French king. This 
 debt at 4 per cent, was reimbursable in ten equal 
 annual instalments, beginning November 5, 1787. 
 The next year 1 a further loan of six million livres 
 was granted, payable between 1797 and 1803. These 
 sums, together with four millions due French citi 
 zens, reached the round figure of thirty-eight millions 
 of livres, or about seven million dollars. 
 
 Between 1782 and 1788 the Government succeeded 
 in negotiating four loans in Holland, one for five 
 million florins, one for two millions, and two loans 
 for a million each. The payment of the interest on 
 the foreign loans was regular, but the interest came 
 directly from the proceeds of the loans themselves. 
 The two one-million loans were expressly obtained 
 and pledged to the payment of interest on the pre 
 ceding ones. Each of the four Holland loans was 
 payable in four instalments, beginning eleven years 
 after date. The first payment was due in 1793. 
 Although frequent recourse to the loan market 
 
30 . Sinking Fiinds. [340 
 
 enabled the Confederation to maintain its credit in 
 Holland, it repeatedly broke its engagements with 
 France. Not only was the interest defaulted for sev 
 eral years, but the instalments of $462,000 falling 
 due in 1787, 1788 and 1789 remained unpaid despite 
 the urgent need of the French treasury. At the 
 close of 1789 the arrearages of interest and the 
 unpaid instalments of the foreign debt amounted to 
 over three millions. 
 
 Summary. 
 
 The effect of the bad financiering of the Confeder 
 ation on the debt is thus summarized by Gallatin : 
 
 " From the 1st of January, 1784, to the 1st of Jan 
 uary, 1790, the principal of the domestic debt was 
 reduced by the sales of land, which amounted to about 
 $1,100,000; but in the meanwhile, the interest ac 
 crued was near ten millions of dollars, of which 
 about six millions remained unpaid. 
 
 " During the same period the greatest part of the 
 interest on the foreign debt accumulated to an 
 amount of about $1,700,000; and a new debt was 
 contracted in Holland of 83,600,000. The whole debt, 
 foreign and domestic, increased therefore, during 
 those six years by a sum exceeding ten millions of 
 dollars." 1 
 
 The New Government. 
 
 At the final stage of the old regime the country 
 wore the appearance of bankruptcy. Credit was kept 
 alive only by the hope that the new government 
 would unseal sources of revenue inaccessible under 
 the defective Confederation. "The Dutch," writes 
 
 Writings, Vol. Ill, p. 124. 
 
341] Sinking Funds. 31 
 
 Jefferson, in May, 1788, "consider us the most certain 
 nation on earth for the principal. The whole body of 
 money dealers .... look forward to the new 
 government with a great deal of partiality and 
 interest." At home the public securities that had 
 commanded only fifteen cents on the dollar, rose 
 from January to November, 1789, thirty-three and-a- 
 third per cent., and from November to the end of the 
 year fifty per cent. more. The publication of Hamil 
 ton s report carried the price to fifty cents on the 
 dollar. 
 
 Of the attributes of the new government the one, 
 perhaps, most coveted by patriots and statesmen was 
 the power "to lay and collect taxes, duties, imposts, 
 and excises." Accordingly upon the establishment 
 of the Treasury Department in 1789, Congress 
 directed Hamilton, the first Secretary of the Treasury, 
 to report a plan for the support of the public credit. 
 The plan presented by him in his "Report on the 
 Public Credit," of January 14, 1790, was as follows: 
 
 The Report on the Public Credit. 
 
 The state is scrupulously to perform the contracts 
 with its creditors. As these involved the right of 
 full transfer, the state should make no discrimination 
 prejudicial to the present holders of the public debt. 
 Since the state can justly make no discrimination 
 between different classes of creditors, it should 
 assume the debts contracted by the individual states 
 for the common defence. Arrears of interest are 
 entitled to equal provision with debt principal. The 
 foreign debt, with interest arrears, amounted to 
 $11,221,564; the domestic debt to $42,414,085. The 
 total annual interest at existing rates on the whole 
 
32 Sinking Funds. [342 
 
 debt, including twenty-five millions of state debts to 
 be assumed, would be 84,587,444. As provision for 
 this sum would strain the resources of the state, 
 Hamilton hopes the creditors may be induced by 
 offer of fair terms to modify their claims. This is 
 but just owing to the prospect of a fall in the rate of 
 interest to five per cent, in five years, and to four per 
 cent, in twenty. It is proposed, therefore, to raise a 
 loan payable in debt and ample to absorb all out 
 standing domestic obligations. For every one hun 
 dred dollars of evidences of debt subscribed to this 
 loan the subscriber should be entitled either to have 
 two-thirds in funded six per cent, stock, and the 
 remainder in land at twenty cents per acre; to receive 
 the whole in four per cent, stock and $13.80 in land: 
 to receive two-thirds in six per cent., stock redeem 
 able at the rate of not more than one per cent, 
 yearly, an^ 826.88 of similar stock in ten years; or 
 to receive a life annuity. In addition to this loan of 
 conversion there should be a loan of ten millions pay 
 able half in debt and half in specie. 
 
 To meet the annual charges, tonnage fees and im 
 port duties are proposed. The proceeds should be 
 devoted in the following order; to the foreign debt, 
 the civil list, the interest of the new loan, and the 
 payment of the unsubscribed old debt. The income 
 from the postoffice, estimated at $100,000, is to be 
 reserved as a sinking fund. The secretary, though 
 regarding the funding of the national debt as a 
 national blessing, is yet so far from believing that 
 public debts are public benefits, that he wishes to see 
 it incorporated in our system as a fundamental 
 maxim, that the creation of debt shall always be 
 accompanied by the means of extinguishment. This 
 
343] Sinking Funds. 33 
 
 is the true secret of rendering public credit immortal. 
 It is, therefore, advised that the net product of the 
 postoffice to a sum not exceeding one million dollars 
 be vested in a Board of Commissioners, to consist of 
 the Vice-President, Speaker, Chief Justice, Secretary 
 of the Treasury, and Attorney General, for the time 
 being. The sum shall be held in trust and applied by 
 them to the discharge of the existing public debt, 
 either by purchases of stock in the market, or by 
 payments on account of the principal, as shall appear 
 to them most advisable in conformity to public 
 engagements. It is furthermore suggested that the 
 commissioners be authorized to borrow on their credit 
 a sum not exceeding twelve million dollars to be 
 applied: 
 
 First To pay the sums due on the foreign debt. 
 
 Secondly To supply any deficiency of funds for 
 the interest on the domestic debt. 
 
 Thirdly To refunding the foreign debt at five per 
 cent. 
 
 Fourthly To purchasing the domestic stock on the 
 market when below par. 
 
 The financial system of Hamilton was in its main 
 features incorporated into the funding act of August 
 4, 1790, carried through in the face of much opposi 
 tion and objection. The central idea of this act is 
 the funding of the debt. Previously the debt was 
 provided for by annual grants. Under this system 
 the claims of the creditor were set every year at the 
 hazard of the passion, partisanship, or intrigue of any 
 one of the three branches of the legislative depart 
 ment. Public faith could be broken by the non-con 
 currence of one branch. But under our funding sys- 
 3 
 
34 Sinking Funds. [3^4 
 
 tern the public creditor acquired a proprietary right 
 over the constituted funds. The revenues of the state 
 were, in part, mortgaged for his benefit. His debt 
 was supposed to be secured not by a mere promise, 
 but by a material pledge. However that may be, it 
 is certain that, once provided for, the creditor was 
 safeguarded against breach of the public faith, not 
 only by the self-preserving inertia of any measure 
 of settled policy, such as a permanent appropriation, 
 but also by the requirement that three branches, 
 House, Senate, President, should concur in its 
 
 repeal. 
 
 The Funding Act. 
 
 The funding act reserves from the current reve- 
 * nues six hundred thousand dollars, or such sum as 
 may from time to time be appropriated for current 
 expenses. As much of the residue as may be needed 
 is appropriated to the payment of interest on foreign 
 loans existing, or on further loans that may be made 
 for paying off the existing foreign loans, to continue 
 until these loans shall be satisfied. With this is 
 coupled authority for the President to raise a loan 
 not exceeding twelve millions to be applied, in the 
 first instance, to paying the arrears, instalments, or 
 principal of the foreign debt. Like most of the Hol 
 land Mans, this must be reimbursable within fifteen 
 years. 
 
 For the interest on the domestic loans proposed, 
 Congress made inviolable and permanent appropria 
 tion of all moneys arising under the existing revenue 
 laws, excepting the part above reserved. That these 
 might never be diverted to any other purpose, the 
 account of their receipt and disbursement was to be 
 kept distinct from the product of any other taxes, 
 
345] Sinking Funds. 35 
 
 except such as should be levied for a like purpose. 
 The faith of the state was furthermore pledged to 
 provide sufficient and permanent additional funds for 
 the full payment of interest on all new stock. 
 
 In return for this new and special security, the 
 creditor, it was hoped, would voluntarily consent to 
 a reduction of his income. To meet the interest at 
 the existing rate of 6 per cent, the government would 
 require a revenue of $5,000,000. This was deemed 
 too severe a strain to put upon untried fiscal machin 
 ery. Accordingly, the funding act contemplated 
 providing for the domestic debt on a four per cent, 
 basis. This reduction was to be effected by a new 
 loan, the subscriptions thereto being made payable 
 in evidences of public debt. The old six per cent, cer 
 tificates were to be exchanged for new funded stocks, 
 or bonds. For every sum subscribed in principal of 
 debt, two bonds were to be issued, one for an amount 
 equal to two-thirds of the subscription, to bear six per 
 cent.; the other for one-third of the subscription, to 
 bear six per cent, after 1800. These two kinds of debt 
 were known as "six per cent, stock" and " deferred 
 stock." As they were liable to redemption at the 
 rate of not more than two per cent, per annum, they 
 could be converted at will into an eight per cent, 
 annuity terminable in about twenty-two years. 
 
 After the principal of the domestic debt was pro 
 vided for, there remained about thirteen millions of 
 "indents," covering interest accruing up to 1791. 
 These were made receivable only for a special kind 
 of stock, redeemable at will, and bearing three per 
 cent, interest. The federal debt once disposed of, the 
 funding act provided for the assumption of $21,500,- 
 000 of state debts incurred in the common cause. 
 
36 Sinking Funds. [34G 
 
 This was to be done by exchanging that quantity of 
 the new stocks, in certain proportions, for an equal 
 amount of the certificates, or indents, issued by indi 
 vidual states. The final provision is that the pro 
 ceeds of all sales of public lands be appropriated to 
 the sinking of the public debt. 
 
 In effect, then, the funding act authorized a for 
 eign loan, created three kinds of domestic stock the 
 six per cents., deferred 6s, and three per cents., pro 
 vided for the conversion into this new stock of the 
 old Revolutionary debt, the accrued interest, and the 
 state debts, and finally made permanent appropria 
 tions both for the interest and for the principal of the 
 new stock. 
 
 To the public creditors the conversion of the debt 
 into a funded loan was not a decree but a proposal. 
 He who refused to subscribe did not forfeit his claim. 
 His rights were unimpaired, but during 1791 he must 
 content himself with the reduced rate of interest of 
 the subscriber to the new loan, and yet remain 
 exposed to the insecurity of a precarious annual 
 grant and optional redemption. Under such circum 
 stances it is not strange that the body of public cred 
 itors subscribed to the new loan, and the funding 
 was a success. 
 
 The Sinking Fund of 1790. 
 
 On August 12, 1790, was approved the act estab 
 lishing the first federal sinking fund. This provided 
 that the surplus revenues of 1790 from imports and 
 tonnage should be applied to purchases of the public 
 debt at its market price, if not above par. The pur 
 chases were to be made under the direction of the 
 Yice-President, Chief Justice, Secretary of State, 
 
347] Sinking Funds. 37 
 
 Secretary of the Treasury, and Attorney General, 
 any three of whom were authorized, with the appro 
 bation of the President, to make such purchases as 
 they should deem hest, provided these be made 
 openly and with due regard to the benefit of the sev 
 eral states. 
 
 The accounts of the application of the fund, accom 
 panied by returns of the amount of debt purchased, 
 were to be rendered at the end of each quarter ; and 
 a full and exact report of the proceedings of the com 
 missioners was to be laid before Congress within the 
 first fourteen days of each session. The report 
 should include a statement of the disbursements and 
 purchases, specifying the time when, prices at which, 
 and persons of whom purchases were made. 
 
 To strengthen the fund the President was author 
 ized to borrow up to 2,000,000, at a rate not exceed 
 ing five per cent., to be applied to purchases of the debt 
 under the same regulations as the surplus of 1790. 
 But, if this was done, there must be reserved annu 
 ally out of the interest on the debt bought by the 
 commissioners a sum, not exceeding eight per cent, of 
 the sum borrowed, to go toward paying the interest 
 and sinking the principal of the same. 
 
 Early Operations on the Debt. 
 
 We have now reviewed legislative provision for 
 the debt. It remains to examine operations under 
 the law. 
 
 The refusal of the government to assume the bur 
 den of the domestic debt till January 1, 1791, twenty 
 months after the inauguration of Washington and 
 fifteen months after the first real revenue began to 
 come in, enabled it to apply the taxing power grad- 
 
38 Sinking Funds. [348 
 
 ually, and to test each part of the revenue machin 
 ery, before putting it to the strain of providing for a 
 debt of nearly eighty millions. The interest for 1790 
 on the home debt was converted into principal. The 
 demands of the foreign debt were met by a new Hol 
 land loan. 1 This left a large part of the revenues of 
 1790 free to fall as surplus into the sinking fund, and 
 be applied to the purchase of certificates. This sur 
 plus was found to be $1,374,656. Under a proviso of 
 the redemption act, a part of this was reserved to 
 meet the heavy interest charges for 1791. The 
 remainder, $957,770 was expended in 1790 and the 
 following two years, in buying up public obligations. 
 
 The first report of the commissioners of the sink 
 ing fund 2 shows that they had promptly obeyed the 
 law by buying $278,687 of debt, at the average rate 
 of 54 cents on the dollar. Their second report 3 shows 
 that $1,131,364 of stock had been bought for $699,163, 
 an average of 62. This proves that the sinking fund 
 of 1790 accomplished its purpose of raising the value 
 of government stock. 
 
 The desirability of this had been urged by Hamil 
 ton in his "Report on the Public Credit." 4 The pur 
 chase of the public debt at market prices, which 
 would be dishonorable before making provision for 
 the debt, would be unexceptional afterward. Its effect 
 would be in favor of the public creditors, as it would 
 tend to raise the value of stock. The government 
 would also gain by the heavy discount at which it 
 would secure its earlier purchases. If it should 
 
 November 12, 1790. 
 
 2 December 21, 1790. 
 
 November 7, 1791. 
 
 4 State Papers, Finance, Vol. I, 25. 
 
349] Sinking Funds. 39 
 
 decline to raise the value of its stock, enormous pro 
 fits would be made by speculating foreigners. But if 
 the government competes with speculators, it will 
 not only reap a part of the profit itself, but its pur 
 chases will contract their field of operation and thus 
 lessen their profit. It will also hasten the rise of 
 stock, and thereby narrow the margin for specula 
 tion. Hamilton further urged the raising of money 
 by foreign loans for purchases of the domestic debt. 
 The growth of the country demanded an injection of 
 foreign capital and, as the credit of the government 
 was higher than that of any citizen, this could best 
 be done by borrowing abroad to pay off debt at home. 
 
 As we have shown, the purchases of the commis 
 sioners raised the price of stock. At the same time 
 they vindicated Hamilton s judgment on other points. 
 The interest and arrears abroad were paid, we have 
 said, by the proceeds of a new Holland loan for 
 1,200,000. This means that the government bor 
 rowed abroad that it might pay its revenues for 1790 
 to its own citizens. Enjoying a very high credit at 
 this time in Amsterdam, it created five per cent, stock 
 at four and a-half premium, that it might set free 
 funds to purchase six per cent, stock at a discount of 
 thirty or thirty-five per cent. It procured at five per 
 cent, capital that enabled it to save eight per cent. 
 
 The sinking fund of 1790 was not called a sinking 
 fund at the time, and strictly speaking, does not 
 deserve the title. It was not a permanent appropri 
 ation, but a special appropriation of the revenues of 
 a single year. It granted an indefinite surplus from 
 a specific source, not a fixed sum from the general 
 income. As surplus it was not inviolable, seeing it 
 could be wiped out by extravagant legislation. On 
 
40 Sinking Funds. 
 
 the other hand, it appeared in a separate account, 
 was under the control of special commissioners, and 
 the income of the fund could be fed by loans. As 
 these loans required eight per cent, to be set aside 
 annually for extinguishing interest and principal, we 
 have the complication of a sinking fund within a 
 sinking fund. 
 
 In his report 1 of January 23, 1782, Hamilton, after 
 announcing the success of the funding scheme, dis 
 cusses the problem of amortization. The measures 
 already taken indicate, he thinks, the intention of 
 Congress to extinguish the debt as soon as possible. 
 In pursuance of this intention Hamilton urges the 
 establishment of a real sinking fund. The basis of 
 such a fund would be the interest of such part of the 
 debt, as should by purchase, payment, or otherwise, 
 be acquired by the United States. This basis would 
 be widened by a saving about to be effected in the 
 foreign debt, and by the sales of public lands. Con 
 gress is therefore urged to adopt the principle, that 
 all interest that shall lapse be set apart and appro 
 priated, in the most firm and inviolable manner, as a 
 fund for sinking the public debt. This fund should 
 be placed under the control of the officials named for 
 the direction of the former fund, and be by them 
 applied to the purchase of the debt, until the annual 
 income of the fund shall equal two per cent, of all 
 the six per cent, stock; thenceforth to be applied to 
 the redemption of the six per cent, stock. It is 
 recommended to the consideration of Congress 
 whether the sinking fund "ought not to be so vested, 
 as to acquire the nature and quality of a proprietary 
 trust, incapable of being diverted without a violation 
 of the principles and sanctions of property.- 9 
 
 1 Finance, Vol. J, p. 146. 
 
351] Sinking Funds. 41 
 
 Changes Made by the Laiu of 1792. 
 The report of Hamilton led to the act of May 8, 
 1792, making further provision for the public debt. 
 This act increased the funds in the hands of the 
 commissioners by adding to the unexpended portion 
 of the surplus of 1790 two items: 
 
 1. All interest accruing on stock purchased, paid 
 off, or in any way acquired, by the treasury. 
 
 2. The unapplied part of all moneys appropria 
 ted to pay the interest on the public debt. 
 
 The charges upon the yearly income of this enlarged 
 and progressive sinking fund were as follows: 
 
 1. An appropriation of eight per cent, in favor 
 of any loans made in behalf of the sinking fund. 
 
 2. Purchases of the various stocks in due pro 
 portions, unless the income of the fund should equal 
 two per cent, of the whole body of outstanding six 
 per cent, stock. 
 
 3. In that case there should be paid yearly two 
 per cent, on the outstanding six per cent, stock. 
 
 4. If there was any residue it should be used in 
 buying any remaining stock. 
 
 All future purchases were to be made at the lowest 
 price in the open market, or by opening sealed pro 
 posals. The commissioners were required to render 
 quarterly accounts for settlement, and to make a full 
 and detailed report of their proceedings to Congress 
 early in each session. 
 
 The act of 1792 introduced two features that made 
 the redemption fund of 1790 a real sinking fund after 
 the English model. It permitted the stock held by 
 one branch of the administration to draw interest 
 from the treasury. It pledged the interest inviolably, 
 and thus bound the government to a policy of amor- 
 
42 Sinking Funds. [353 
 
 tizing,even if compelled at the same time to create new 
 debt at higher interest. With all this the sinking 
 fund of 1792 was far inferior in efficiency to that of 
 Pitt, inasmuch as, beyond the annual interest on 
 stock held, it had no permanent appropriation. The 
 British sinking fund of that time, on the other hand, 
 received besides interest an annual grant from the 
 treasury of one million pounds. 
 
 As the act of 1792 made no distinct appropriation 
 from current revenues to the discharge of the debt, 
 the action of the sinking fund was too slight to 
 exhibit results. The practical effect of the new law 
 was to add to the redemption nest-egg the surplus 
 of 1790 the regular interest accruing on stock there 
 with purchased. After this, the reports of the com 
 missioners showed two purchases of stock one with 
 money arising from foreign loans made under the 
 act of 1790, and one with money received as interest 
 under the law of 1792. 
 
 When the new law passed into effect there stood to 
 the credit of the commissioners government securities 
 to the amount of si, 456,743. On these there would 
 yearly accrue in interest 37,465. The annual interest 
 account, therefore, the sole certain resource of the 
 sinking fund, amounted then to less than S38.000, 
 while aside from purchases, actual redemption of the 
 debt could not begin till the income of the fund 
 reached two per cent, of the outstanding six per cent, 
 stock, that is, nearly 8600,000. At this rate, unless 
 greatly aided by the stubs of interest appropriations, 
 the fund would not really redeem any part of the 
 debt within a life time. So inadequate was the 
 sinking fund to do aught but make occasional slight 
 purchases of securities, that Congress at the next 
 
353] Sinking Funds. 43 
 
 session attacked in earnest the problem of debt 
 reduction, and directed Hamilton to report a plan. 
 
 In December, 1792, Hamilton reported his plan 
 The surplus of present revenues should, he thought, 
 be devoted to contingencies, to buying stock, or to 
 paying interest on the deferred 6 per cents, when, 
 in 1802, they,too, should begin drawing interest. There 
 remain but three methods of raising the 600,000 
 that constituted the two per cent, legally payable on 
 the six per cent. stock : by loans alone, by taxes alone, 
 or by a combination of these two. The first would 
 be nothing but conversion and would effect nothing, 
 unless the new loan could be placed at a lower rate 
 than six per cent. The second method would put too 
 severe a strain upon the revenue machinery. The 
 third method, then, seemed the wisest. The combin 
 ation of loans and taxes might assume different 
 forms. Just sufficient taxes might be laid to meet 
 the interest on the annual loan for redeeming the six 
 per cent, stock, or such taxes might be laid as would 
 suffice not only to pay the interest, but also to dis 
 charge the principal of the loan within a short and 
 definite term. The latter plan commended itself to 
 the secretary. Accordingly he elaborated an exceed 
 ingly complicated and intricate fiscal apparatus, by 
 which the yearly imposition of $100,000 or more of 
 new taxes should enable the government to redeem, 
 by 1802, $5,500,000, and have on hand at that time 
 an annual fund of $1,200,000 for further redemption, 
 and for the $800,000 of interest on the deferred stock 
 that should begin in 1802. The plan was very ingen 
 ious, but was never favored by Congress. 
 
44 Sinking Funds. [354 
 
 Complications. 
 
 An interesting chapter of politics arose out of the 
 loans in behalf of the sinking fund. We have 
 already seen how, by the two great financial meas 
 ures of August, 1790, foreign loans to the amount of 
 $14,000,000 were authorized, 812,000,000 to be devoted 
 to the service of the existing foreign debt, and 82,000,- 
 000 to the purchases of the sinking fund. Hamil 
 ton strove to keep these loans separate, but found it 
 impracticable. He therefore abandoned the attempt 
 to keep the loans distinct, and issued stock upon the 
 general authority of the two acts of Congress. Under 
 these acts there were floated in Holland, between 
 1790 and 1794, no less than seven loans yielding 
 89,400,000 and payable in eleven to fifteen years. Of 
 these funds about three millions 1 crossed the Atlan 
 tic and was swallowed up in the expenditures of a 
 government, which had not yet succeeded in living 
 within its income. The Indian war, the Whiskey 
 rebellion, the hostile attitude of England, and the 
 tribute to Algiers caused alarming deficiencies in the 
 receipts. Under these circumstances the large sums 
 drawn from abroad, though legally applicable only 
 to the purchases of the sinking fund, were withheld 
 and used for current expenses. 
 
 We find, therefore, that the results of the sinking 
 fund were far inferior to what was expected and 
 provided for. Up to April, 1795, at which time a 
 new sinking fund had been formed, there had been 
 expended by the commissioners besides the 8220,203 
 of interest, that had accrued on stock held by them, 
 only 81 392,072, being but $18,036 more than the sur 
 plus revenue of 1790, that had constituted the nucleus 
 
 1 Hamilton s "Works," Vol. II, p. 438. 
 
355 1 Sinking Funds. 45 
 
 of the former sinking fund. After every allowance 
 is made there remains $1,604,252 of the fund brought 
 from abroad still unaccounted for, so far as the sink 
 ing fund is concerned, although the money was 
 always brought in ostensibly for its use. It is not 
 necessary to recount how the complications that 
 Hamilton permitted to creep into the accounts resulted 
 in attacks, charges, and an investigation. The fate 
 of the loans on behalf of the sinking fund, however, 
 emphasizes the fact that, despite the sinking fund, 
 the government was creating debt considerably faster 
 than it was cancelling debt. 
 
 By a statement of April, 1795, it appears that the 
 commissioners had bought $2,307,661 of the three 
 kinds of government stock with $1,618,986 of cash 
 an average price of 70. Besides this the commis 
 sioners had $209,426 of interest-bearing certificates 
 representing a debt to French officers that the treas 
 ury had paid off, $151,640 of stock paid in by the 
 state of Pennsylvania for a tract of land on Lake 
 Erie, and $34,753 of stock paid in by individuals. 
 Altogether there was $2,703,481 of stock on which 
 the commissioners of the sinking fund drew inter 
 est from the treasury. 
 
 Before taking the next step let us pause and review 
 briefly the whole financial legislation from the begin 
 ning of the government, as presented in Hamilton s 
 final "Report on the Public Credit." He considers 
 it under three heads : 
 
 1. The revenues established. 
 
 2. The provisions for funding the debt and paying 
 the interest. 
 
 3. The provisions for extinguishing the domestic 
 debt. 
 
4G Sinking Funds. [356 
 
 According to Hamilton s resume the current rev 
 enues were derived from imports, tonnage, spirits, 
 postage, patent fees, dividends of bank stock, snuff, 
 sugar, auction sales, licenses and carriages. Of 
 these, the first three were permanently pledged to 
 the payment of interest on the public debt as long as 
 it should last. The fourth and fifth were indefinite, 
 the sixth source would remain as long as the govern 
 ment owned bank stock, and the rest were all tem 
 porary, expiring with the Congress that established 
 them. 
 
 The three permanent taxes were charged in regu 
 lar order with : 
 
 1. The current expenses up to 8600, 000. 
 
 2. The interest on the foreign debt. 
 
 3. The interest on the original domestic debt as 
 funded. 
 
 4. The state debts assumed. 
 
 5. The balances to creditor states. 
 
 After satisfying these charges any surplus of the 
 duty 011 spirits was permanently appropriated to the 
 reduction of the debt. The surplus of the other two 
 duties had no such ultimate appropriation. 
 
 From the eight laws reviewed by Hamilton it 
 appears that legislation had devoted to the extinction 
 of the debt: 
 
 1. The surplus of 1790 ($1,374,636). 
 
 2. The proceeds of all sales of Western lands. 
 
 3. A loan not to exceed two millions. 
 
 4. The unappropriated surplus of the duties on 
 spirits. 
 
 5. The interest on any government stock acquired 
 by the Treasury except 8 per cent, on all sums bor 
 rowed under (3). 
 
357] Sinking Funds. 47 
 
 6. The surplus of any interest appropriation. 
 
 7. Certain special appropriations those, namely, 
 for that part of the debt owed to the United States 
 Bank, ($1,400,000). Of these, all but the last item 
 were under the control of the commissioners of the 
 sinking fund. 
 
 As we have shown, despite all these elaborate and 
 ambitious provisions, very little had been done. 
 Hence, when Congress met in the session of 1794-5, 
 the conviction was general that something really 
 effective must be done to reduce the debt. The Pres 
 ident, in his address to Congress observed, that the 
 time had come "for a definitive plan for the redemp 
 tion of the Public Debt." He urged Congress to 
 "consummate this work without delay. Nothing can 
 more promote the permanent welfare of the nation, 
 and nothing would be more grateful to our constitu 
 ents," and "we ought to prevent that progressive 
 accumulation of debt which must ultimately endanger 
 all governments." 
 
 The problems now confronting Congress required: 
 
 (1). That the twenty-seven millions of six per cent, 
 stock be redeemed at the yearly rate permitted by the 
 terms of contract, viz., two dollars on every hundred; 
 
 (2). That the $1,400,000 still owed to the United 
 States Bank, due in seven annual instalments, be 
 paid as it fell due; 
 
 (3). That the interest that should begin to accrue 
 in 1801 on nearly fifteen millions of deferred six per 
 cents be provided for; 
 
 (4). That in 1802, after the last instalment of the 
 bank debt had been paid, there should begin the 
 redemption of this deferred stock at the rate of two 
 per cent, annually. 
 
48 Sinking Funds. [358 
 
 Such was the task to which Congress addressed 
 itself. It was unanimously resolved to "put an end 
 to that clamor which the durability of the debt has 
 excited" by "making provision for the reduction of 
 the debt/ and attempting "honestly to provide an 
 efficient sinking fund." It was while engaged in this 
 task that Hamilton, on the eve of retirement, sub 
 mitted, in perhaps the most brilliant of his state 
 papers his final "Report on the Public Credit a 
 skillful and elaborate plan of debt reduction. So 
 able was his review of the situation and so lucid and 
 telling his reasoning, that his plan was adopted 
 almost without change, and embodied in the act of 
 March 3, 1795. 
 
 The Sinking Fund of 1795. 
 
 This act was a wide-reaching measure, disposing 
 of the surplus revenues of the country for over a quar 
 ter of a century, and making final and definitive pro 
 vision for $46,000,000 of the debt, something over 
 three-fifths of the whole. It greatly enlarged the 
 province of the sinking fund commissioners, and 
 made great additions to their appropriation, which 
 now for the first time received the name of "Sinking 
 Fund." 
 
 The salient provisions of this act were as follows: 
 It had been from the first the rule of the custom 
 house to accept for duties over fifty dollars a revenue 
 bond running from four to twenty-four months. But 
 this easing of importers by the granting of credits, 
 resulted in supplying the treasury with bonds instead 
 of cash. It therefore become necessary to anticipate 
 the maturing of these bonds by making short loans 
 from year to year. This had previously been within 
 
359] Sinking Funds. 49 
 
 the province of the Secretary of the Treasury. By 
 the new law the commissioners of the sinking fund 
 were empowered to borrow a sum not exceeding 
 $100,000 annually, in anticipation of the revenue. 
 These loans were always supposed to be made in 
 behalf of the interest of the public debt, and to anti 
 cipate revenue devoted to that purpose. 
 
 The sinking fund was now enlarged by the follow 
 ing additional appropriations: 
 
 1. So much of the permanent duties as, with exist 
 ing income, should enable the commissioners to pay, 
 in 1796 and thereafter, a yearly two per cent, of the 
 six per cent, stock. 1 
 
 2. The surplus dividends on the government 
 $2,000,000 of United States Bank stock after deduct 
 ing the interest accruing on the remnant of the bank 
 loan. 
 
 3. So much of the permanent duties as, with the 
 surplus dividends, should suffice to pay a yearly 
 $200,000 on the bank loan, till 1802, and then begin 
 the redemption of the deferred stock. 
 
 4. The proceeds of the sale of public lands. 
 
 5. The proceeds of debts inherited from the old 
 government. 
 
 6. All revenue surpluses of any year remaining 
 unappropriated during the next session of Congress. 
 
 These appropriations were to continue until the 
 entire existing domestic debt of the nation, as well as 
 loans in aid of it, should be totally extinguished. 
 The sinking fund thus constituted was, on the faith 
 of the United States pledged and inviolably vested, 
 in trust, in the commissioners, for the redemption of 
 
 x Except balances to creditor states. This restriction was remov 
 ed April, 1796. 
 4 
 
50 Sinking Funds. [3GO 
 
 the public debt! Its resources could not be diverted 
 to any other object till the only outstanding debt 
 was the three per cent, stock. Then Congress might 
 use the money as it saw fit. 
 
 The commissioners held the resources of the sink 
 ing fund as a proprietary trust clothed with the 
 sanctions of private property. They superintended 
 all payments on behalf of the principal of the debt. 
 In order that the apparatus for amortization might 
 be complete and independent of external aid, the 
 commissioners were clothed with authority to make 
 loans needful for carrying out its tasks. 
 
 The act contained another provision worthy of 
 notice. Although heavy instalments were soon to 
 fall due on the Dutch debt, no authority was given 
 to the commissioners to pay them. This was owing 
 to the hope that the treasury might be relieved of 
 the payments abroad. This act of 1795 ordered that 
 new stock be offered to foreign creditors in exchange 
 for the old. This new stock bore interest one-half 
 per cent, higher than the old, and payable in the 
 United States. The principal was redeemable at the 
 option of the government. It was confidently ex 
 pected that the plan of conversion would succeed, 
 and the treasury would thus be relieved sufficiently 
 to carry out the project of redeeming the home debt. 
 
 The sinking fund of 1795 was the most rigid that 
 could be/levised. The law sought to fix the policy 
 in regard to the debt for many years to come. In 
 his next report Secretary Walcott observed that "As 
 the injunctions of the law upon the commissioners 
 of the sinking fund are unconditional, and as per 
 manent funds have been invested and appropriated, 
 it is conceived that a successive reimbursement annu- 
 
361] Sinking Funds. 51 
 
 ally of the debt .... has become an irrevocable 
 stipulation with the creditors." 
 
 With the close of this review of Hamilton s finan 
 cial system it may be well to inquire how far Hamil 
 ton and his party were influenced by the erroneous 
 ideas that at this time ruled in English finance. It 
 is just here that a political controversy has raged. 
 The Federalist writers have eagerly sought to show 
 that our early fiscal history was uninfluenced by a 
 theory, afterwards so ignominiously abandoned. 
 
 Mr. Henry C. Lodge says of the sinking fund : 
 This was nothing more than the ordinary sinking fund as it is 
 used and understood at the present day, not only in all civilized 
 governments, but in innumerable corporations. It was merely a 
 plan for actual savings to be applied to the extinction of debt. But 
 coming at a time when Pitt used sinking fund as a term to conjure 
 with, and by ingenious calculations of the rate of interest was per 
 fecting a juggle, which served to blind a whole generation of Eng 
 lishmen and which actually led them to believe that debts could 
 be extinguished, not by payment, but by further borrowing, this 
 arrangement is interesting from its business-like simplicity and 
 sense. There was nothing of Pitt s ingenuity about Hamilton s plan. 
 For him the sinking fund was a convenient business device, noth. 
 ing more. He had too keen a mind to be deceived himself, and he 
 
 had no wish to corf use and befool others He put forth 
 
 his scheme of funding and sinking not as the incantations of an 
 enchanter by which debts could be paid without saving but as busi 
 ness-like ariangements . , . . 1 
 
 This comparison of Pitt and Hamilton seems hardly 
 just to the former. Pitt s sinking fund was by no 
 means the piece of pure folly that people imagined. It 
 started with a clear surplus and, though over-intricate, 
 would have done well enough if war had not broken 
 out in 1793. It was in refusing to suspend it then that 
 the great mistake was made. But this mistake 
 would not have been made, had not his sinking 
 
 Lodge s "Life of Hamilton," p. 93. 
 
5^ Sinking Funds. [362 
 
 fund been founded with wrong notions as to its 
 nature, and vain hopes as to its effacacy, 
 
 But there are other errors besides those relating to 
 the effectiveness of a sinking fund at compound inter 
 est which may lead to the mistake of keeping up amor 
 tization in borrowing times. Such a mistake may 
 quite as well flow from over-hasty solicitude for the 
 public credit, or from too tender a care for the lender, 
 as from the compound-interest illusion. Certain it 
 is, that Hamilton induced Congress to lock up the 
 revenues as securely as possible against legislative 
 discretion, or the demands of an emergency. 
 
 In his "Reports," Hamilton recommends the 
 maxim, that "the creation of debt should always 
 be accompanied with the means of extinguishment." 
 In a note he refers to Pitt s one per cent, sinking fund 
 of 1792-98, and adds, "Let the United States never 
 have to regret hereafter that they postponed too long 
 so provident a precaution." Further he recommends 
 an inviolable application of the fund, suggesting that 
 it be "clothed with the character of private property" 
 and its application be made "a part of the contract 
 with the creditors." "Experience has shown . . . 
 that a simple appropriation to the sinking fund is 
 not a complete barrier against its being diverted 
 when immediate exigencies press. This indicates the 
 utility of endeavoring by additional sanctions to give 
 inviolability to the fund." 
 
 The sinking fund as "the essential basis of credit" 
 must be maintained even in deficit periods, for "the 
 emergencies which induce a diversion of the fund 
 are those in which loans, and consequently credit, 
 are most needed." On this Professor H. C. Adams 
 pithily remarks: "It is an error to say that public 
 
363J Sinking Funds. 53 
 
 credit is dependent upon maintaining inviolable pay 
 ments ; it depends rather on simplicity in public 
 accounts and upon energy, on the part of the admin 
 istration, in the prosecution of whatever purpose it 
 undertakes." 1 
 
 Mr. Henry Adams, in his "Life of Gallatin," sum 
 marizes Hamilton s work : 
 
 "Adhering more or less closely to the English financial theories 
 then in vogue, he had intentionally constructed a somewhat elabor 
 ate fabric, of which a considerable national debt was the founda 
 tion. 2 .... One of the several English ideas adopted by Mr. 
 Hamilton from Mr. Pitt was a sinking fund apparatus. Even at 
 that time of Mr. Pitt s supreme Authority it can hardly be conceived 
 that any one really believed a sinking fund to be effective so long 
 as a government s expenditure exceeded its income ; it was, how 
 ever, certainly the fashion to affect a belief in its efficacy at all 
 times, and although, if Mr. Pitt and Mr. Hamilton had been pressed 
 on the subject, they might perhaps have agreed that a sinking fund 
 was always expensive and never efficient except when there was a 
 surplus, they would in the end have fallen back on the theory that 
 it inspired confidence in ultimate payment of the debt. Their 
 opponents would not unnaturally consider it to be a mere fraud 
 designed to cover and conceal the true situation. 3 . . *. . In theory 
 Mr. Hamilton also was in favor of discharging the debt, and origi 
 nated the machinery for doing so ; that is to say, he originated the 
 sinking fund machinery, or rather borrowed it from Mr. Pitt, 
 although this financial juggle has now become, both in England and 
 America, a monument of folly rather than of wisdom." 4 
 
 Gallatin criticized "the mystifying and useless 
 machinery, with which Mr. Hamilton, had in imitation 
 of Mr. Pitt, encumbered the very simple subject of 
 paying the debt," and declared that the appropria 
 tions subsequent to 1795 "do not seem to have pro 
 duced any other effect than that of rendering still 
 more complex a system in its nature sufficiently 
 
 ^ Public Debts", p. 265. 
 2 "Life of Gallatin", p. 167. 
 3 "Life of Gallatin", p. 173. 
 4 "Lifeof Gallatin", p. 171. 
 
54 Sinking fund*. L 364 
 
 intricate." Upon the strength of Gallatiivs criticism 
 Randolph, in a report of the ways and means com 
 mittee, alleged that "no effectual provision for the 
 final redemption of the whole present debt of the 
 United States does at this time exist," and added the 
 sneer, "To the measures which have already been 
 adopted in relation to this subject, their complexity 
 forms an objection inferior only to their insuf 
 ficiency." 
 
 With the weight of authority backing up conclu 
 sion from the facts it would seem no longer possible 
 to deny that our early finance was too much influ 
 enced by English precedent. 
 
 Let us see what grounds there were, in 1802, for 
 Gallatin s severe criticism upon the structure reared 
 by the hands of Hamilton. The main object of the 
 law of 1795 was to secure the regular payment of the 
 six per cent, and deferred stocks. By this law they 
 were virtually converted into a terminable eight per 
 cent, annuity, expiring in twenty-three years from 
 the first payment. Agreeably to this idea no dis 
 tinction was made between the interest account and 
 that of the principal. The regular dividend of 1| 
 per cent, on the nominal capital was paid on the last 
 day of March, June and September, and 3 per cent, 
 on the last day of each year. 
 
 To liberate the revenue for this purpose it was the 
 intent of the law, as we have seen, to convert the 
 Dutch debt into home debt by offering an increase of 
 i per cent, in the rate of interest. By this operation 
 would be made optional the redemption of over 14,- 
 000,000 then approaching maturity, and the amor 
 tization of the 6 per cents, could proceed according 
 to plan. 
 
36 5 J Sinking Funds. 55 
 
 The efforts of Wolcott to convert the balance of 
 the debt to France were successful, and $1,84$, 900 
 of 5 per cent, stock, and $176,000 of 4 per cent, stock 
 were converted into equal amounts of domestic stock, 
 known as the "5i s" and 4^ s" of 1795. The 
 rest of the foreign debt was due to the Dutch capi 
 talists in Amsterdam and Antwerp. These declined 
 to exchange their nearly matured stock for new 
 domestic debt, so the project failed. Thus the first 
 defect in the plan of 1795 was, that the government 
 found itself compelled to provide, according to con 
 tract, for the payment during the next fifteen years 
 of $12,200,000 not contemplated in the plan. 
 
 Another unforeseen difficulty arose in 1796. We 
 have seen that the sinking fund was charged for 
 seven years with an annual $200,000 on account of 
 the subscription loan from the United States Bank. 
 But there were other bank loans unprovided for, 
 viz., temporary loans in anticipation of the revenue 
 tied up in revenue bonds. These were of three kinds: 
 loans for current expenses, loans by the commission 
 ers for the interest on the public debt, and loans, 
 funded on the revenues, for specific purposes, such 
 as the Indian war, the ransom and tribute to Algiers, 
 and the Whiskey insurrection. For most of these 
 loans were pledged the actual revenues of the current 
 year, when they should fall due the next year. But 
 as next year s taxes were likewise tied up from next 
 year s needs, the pledged taxes, when they finally did 
 reach the treasury, were all absorbed in current 
 expenses. So the temporary bank loans once made 
 were constantly renewed, until, on January 1, 1796, 
 they amounted to $6,200,000. As by its heavy 
 accommodations ($6,000,000) the United States Bank 
 
66 Sinking Funds. [366 
 
 had parted with two-thirds of its capital, and seri 
 ously crippled its operations, it pressed for payment 
 of its loans as they fell due. Thus one year after 
 " permanent and effective provision " had been made 
 for the debts of the United States, the commission 
 ers were embarassed by a call for $400,000 from Hol 
 land, and one for $4,600,000 from the United States 
 Bank. These constituted an unlooked-for demand of 
 $5,000,000. 
 
 To meet the emergency the commissioners were 
 authorized to borrow to the extent of $5,000,000. 
 For this they were to issue funded 6 per cent, stock, 
 not redeemable before 1819. For its redemption 
 were pledged the funds to be released by the extinc 
 tion of the old 6 per cent, stock in 1818. In case 
 they saw fit the commissioners were allowed as a 
 final resource to sell the shares of the United States 
 Bank, held by the government. 
 
 The delay of an opposition Congress, both in lay 
 ing new taxes and in funding the floating debt, had 
 greatly injured the credit of the country. When the 
 commissioners essayed to place the $5,000,000 loan 
 the stock found few purchasers and the attempt 
 proved abortive. The market was already loaded 
 with stock, and after several months only $80,000 
 had been taken, for which $70,000 was received. 
 
 Finally part of the United States Bank stock held 
 by the government was sold. This was a serious 
 invasion of the sinking fund, seeing that one of its 
 resources was dividend on bank stock. Hamilton 
 denounced it as an infatuated step, and a fatal inva 
 sion of the system for paying the debt. Wolcott, 
 too, opposed it, but necessity compelled. Accord 
 ingly 2,780 $400-sharesof bank stock were sold at 25 
 
367] Sinking Funds. 57 
 
 per cent, premium, yielding $1,384,260. This sum 
 afforded such relief as permitted a postponement of 
 the balance, which was subsequently paid out of 
 current revenues. As to the $400,000 due Holland, 
 the government was enabled to pay it by an unex 
 pected increase of the revenue. 
 
 By these means the commissioners were tided over 
 the difficulties of 1796. But the experience had 
 served to show the defects in the system, and in his 
 report of December, 1796, Secretary Wolcott called 
 for an additional yearly million and a quarter to 
 carry out the plan of redeeming the debt. He sug 
 gested a direct tax on the states, but the proposal 
 was rejected, and Congress laid additional duties for 
 the payment of the Dutch debt and the bank loans. 
 At the same time, an act was passed authorizing 
 the receipt of evidences of public debt in payment of 
 land in the Northwest. 
 
 Though these measures were inadequate, the year 
 3797 was a prosperous year, and $1,627,414 of the 
 regular revenues was expended in reducing the debt. 
 Had it not been for the defensive measures occa 
 sioned by the hostile attitude of France, the great 
 era of debt payment might have dated from this 
 year instead of from 1801. 
 
 Likewise in 1798 the revenues were prolific, and 
 with ordinary expenditures there would have been a 
 large surplus for the debt. But the war appropria 
 tions obliterated this margin and went far beyond. 
 It was decided to lay a direct tax of $2,000,000 on the 
 states, and the President was authorized to raise a 
 tax -loan of two millions in anticipation of this 
 amount. Another loan for $5,000,000 was authorized 
 reimbursable after fifteen years. For its service was 
 
58 Sinking Funds. [368 
 
 pledged the surplus of import and tonnage duties 
 beyond the permanent appropriation charged thereon, 
 and the faith of the United States was pledged to 
 make up any deficiency. The President was further 
 more authorized to add vessels to the navy and issue 
 as payment six per cent, stock redeemable at pleasure. 
 By this authority there was issued in 1799, $711,700 
 of this stock, known in our financial history as the 
 "navy six per cents." 
 
 When the $5,000,000 loan came to be filled, it was 
 found that the traditional rate of six per cent, was 
 too low for placement at par. Accordingly eight per 
 cent, was offered and the loan was filled at this rate. 
 But this brought to light the danger lurking in Ham 
 ilton s policy of rigid amortization. The very year 
 the eight per cent, stock was issued, the commis 
 sioners expended $038,000 on behalf of the principal 
 of the six per cents. The interest loss occasioned by 
 this one amortization was therefore $12,760 a year 
 during the whole period of the eight per cents. A 
 similar loss would be shown on each of the subse 
 quent payments that redeemed 6 per cents, when 
 8 per cents might have been amortized. 
 
 On February 28, 1800, the committee on ways 
 and means announced a probable deficit for that 
 year of $3,500,000. A new loan for this amount was 
 accordingly recommended. In a later report the 
 committee brought forward a plan for sinking this 
 loan and the $5,000,000 loan of the preceding year. 
 At eight per cent, the annual interest charge would 
 be $680,000. Besides this there should be provided a 
 sinking fund sufficient for a yearly payment of two 
 per cent, on the principal. This would call for 
 $170,000. As the term of the $5,000,000 loan, how- 
 
369] Sinking Funds. 59 
 
 ever, forbade any reimbursement for ten years, it was 
 proposed to apply the annuity for ten years to the 
 general purchase of the public debt. The plan, there 
 fore, contemplated a sinking fund payment of $170,000 
 for ten years, and then a ten per cent, annuity term 
 inable in fourteen years. This extreme anxiety to 
 begin amortizing a loan at its very creation shows 
 the influence of Pitt s sinking fund of 1792. 
 
 In accordance with these recommendations Con 
 gress authorized a loan for $3,500,000, reimbursable 
 after fifteen years. Under this authority $1,481,700 
 of eight per cent, stock was issued, for which was 
 received $1,565,229, being a premium of $83,529, or 
 nearly five and three-quarters per cent. Thus, as 
 will be explained in Chapter III, 1 the annual interest 
 included a small sinking fund payment. To raise the 
 annual $850,000 planned by the committee, additional 
 revenues to that amount were provided by the reve 
 nue act of May 13, 1800, and were exclusively appro 
 priated to the discharging of the interest and princi 
 pal of the public debt "heretofore contracted, or to be 
 contracted, during the present year." 
 
 This closes the chapter of Federalist financiering. 
 Our next task is to show how the Federalist system 
 was criticised and mended by financiers of another 
 school. 
 
 The year 1801 saw the consummation of a political 
 revolution that established in power a party pledged 
 to the payment of the debt. Jefferson later declared 
 that his administration made all other objects subor 
 dinate to this, and his finance minister, Gallatin, 
 replied that "the reduction of the debt was certainly 
 the principal object in bringing me into office." 
 
 J Page 101. 
 
 2 Adarns "Life of Gallatin", p. 270. 
 
60 Sinking Funds. [370 
 
 The new secretary brought to his task views dif 
 ferent from those heretofore ruling in our financial 
 policy. The divergence appears clearly in the debate 
 of January, 1800. In a passage alluding to England, 
 Mr. Harper said: 
 
 "Her present minister, at the commencement of his administra 
 tion in 1783, established a permanent sinking fund, which now pro 
 duces very great effects; he also introduced a maxim of infinite 
 importance in finance which he has steadily adhered to, that when 
 ever a new loan is made the means shall be provided not only of 
 paying the interest, but of effecting a gradual extinction of the 
 principal." .... "These ideas, profiling by the example of 
 England, we have adopted and are now practicing on. We have 
 provided a fund which is now in constant operation, for the extin 
 guishment of our debt. This fund will extinguish the foreign debt 
 in nine years from now, and the six per cent., a large part of our 
 domestic debt, in eighteen years. I trust we shall adhere to this 
 plan, and whenever we are compelled by the exigency of our affairs 
 to make a loan, by providing also for its timely extinguishment, 
 we may always avoid an inconvenient or burdensome accumulation 
 of debt." 
 
 Mr. Gallatin, in reply, laid down a principle not 
 acknowledged by English statesmen till Hamilton s 
 expose in 1813. 
 
 . . . . "I know but one way that a nation has of paying her 
 debts, and that is precisely the same which individuals practice, 
 spend less than you receive, and you may then apply the surplus 
 of your receipts to the discharge of your debts. But if you spend 
 more than you receive, you may have recourse to sinking funds, 
 you may modify them as you please, you may render your accounts 
 extremely complex, you may give a scientific appearance to additions 
 and substractions, you must still necessarily increase your debt. If 
 you spend more than you receive, the difference must be supplied 
 by loans; and if out of these receipts you have set a sum apart to 
 pay your debts, if you have so mortgaged or disposed of that sum 
 that you cannot apply it to your useful expenditure, you must bor 
 row so much more in order to meet your expenditure. If your 
 revenue is nine millions of dollars and your expenditure fourteen, 
 you must borrow, you must create a new debt of five millions. 
 But if two millions of that revenue are, under the name of sink 
 ing fund, applicable to the payment of the principal of an old 
 
371] Sinking Funds. Gl 
 
 debt, and pledged for it, then the portion of your current revenues 
 applicable to discharging your current expenditures of fourteen 
 millions is reduced to seven millions; and instead of borrowing 
 live millions you must borrow seven; you create a new debt of 
 seven millions, and you pay an old debt of two. It is still the same 
 increase of rive millions of debt. The only difference that is pro 
 duced arises from the relative price you pay for the old debt and 
 the rate of interest you pay for the new. At present we pay yearly 
 a part of a domestic debt bearing six per cent, interest, and of a for 
 eign debt bearing four or five per cent, interest; and we may pay 
 both of them at par. At the same time we are obliged to borrow at 
 the rate of eight per cent. At present, therefore, that nominal 
 sinking fund increases our debt, or at least the annual interest 
 payable on our debt." 1 .... 
 
 It may be asked why, if Gallatin saw through the 
 sinking fund illusion, did he adopt the sinking fund 
 machinery into his system ? The answer is given in 
 his own words. He says of debt payment : 
 
 "As to the forms adopted for attaining that object, they are of 
 quite subordinate importance. Mr.*Hamilton adopted those which 
 had been introduced in England by Mr. Pitt, the apparatus of com 
 missioners of the sinking fund, in whom were vested the redeemed 
 portion of the debt, which I considered as entirely useless, but 
 could not as Secretary of the Treasury attack in front, as they were 
 viewed as a check on that officer, and because, owing to the preju 
 dices of the time, the attempt would have been represented as 
 impairing the plan already adopted for the payment of the debt. I 
 only tried to simplify the forms, and this was the object of my let 
 ter 2 to the committee on the ways and means. The injury which 
 Mr. Pitt s plan did was to divert public attention from the only pos 
 sible mode of paying a debt, viz., a surplus of receipts over expen 
 ditures, and to inspire the absurd belief that there was some mys 
 terious property attached to a sinking fund which would enable a 
 nation to pay a debt without the sine qua non condition of a sur 
 plus But the only injury done here by the provinions 
 
 respecting the commissioners of the sinking fund, and by certain 
 specific appropriations connected with the subject, was to render it 
 more complex, and to make the accounts of the public debt less per 
 spicuous and intelligible. Substantially they did neither good nor 
 harm. The payments for the public debt and its redemption were 
 
 Adams Gallatin, p. 229. 
 2 Finance, Vol. I, p. 746. 
 
62 Sinking Funds. [372 
 
 not in the slightest degree affected, either one way or the other, 
 by the existence of the commissioners of the sinking fund, or by 
 the repeal of the laws in reference to them. The laws making 
 permanent appropriations were much more important. Even with 
 respect to these it is obvious that they must also have become nuga 
 tory whenever the expenditure exceeded the income. Still they 
 were undoubtedly useful by their tendency to check the public 
 expenses." 1 
 
 So much for criticism of general policy. In his 
 above mentioned letter Gallatin presented the case 
 against the existing situation. 
 
 There existed at this time as a vested and inviolable 
 fund only the appropriations of March 3, 1795. This 
 fund provided regularly for an eight per cent, annuity 
 on the six per cent, stock. After this payment had 
 been taken out there remained for the Dutch debt, 
 four and a half per cent, stock, five and a half per 
 cent, stock, 880,000 of six per <?ent. stock, and bank 
 loans, only the surplus of revenues and the receipts 
 from public lands. The former had so far yielded 
 nothing and could not be looked upon as a sure and 
 inviolable source, as long as Congress had power 
 utterly to defeat this provision by heavy appropria 
 tions for other objects. The latter item, estimated at 
 8400,000 a year, though applicable to any part of the 
 public debt (except the eight per cent, stock and navy 
 sixes) not already provided for, was totally inadequate 
 even for the Dutch debt. It is true additional duties 
 had been imposed in 1797 for these purposes, but they 
 would not yield over $500,000 yearly, while for six 
 years yet, the Dutch debt alone would require an 
 average .of 81,000,000. Without better provision the 
 Dutch instalments would continue, in the future, as 
 in the past, to be paid hap-hazard and without 
 authority. 
 
 Adams Gallatin, p. 296. 
 
373] Sinking Funds. 63 
 
 There were in fact several enactments, since 1795, 
 providing for the Dutch debt, the bank loans, and 
 the $7,271,900 of new stock, but this supplementary 
 legislation was not engrafted upon the original plan. 
 The auxiliary resources were not a part of the sink 
 ing fund, were not vested in the commissioners, nor 
 pledged on the faith of the United States, and were, 
 therefore, repealable at will of Congress without 
 breach of contract with the public creditors. Such, 
 legislation, thought Gallatin, could not be held to be 
 part of a permanent provision for redeeming the pub 
 lic debt. Moreover, these appropriations, not being 
 accompanied by an imperative clause directing pay 
 ment, enjoyed no priority over appropriations for 
 current expenses. All alike rested on moneys in the 
 treasury, and, if any must go unsatisfied, the choice 
 lay with the Secretary of the Treasury. A hostile 
 secretary might favor other appropriations and thus 
 defeat the provision made by Congress for the 
 redemption of the debt. In view of these facts Sec 
 retary Gallatin pronounced the existing provisions 
 for the public debt not only intricate, difficult of exe 
 cution, uncertain in amount, and dependent on the 
 will of the legislature, but even inadequate and 
 precarious. 
 
 The Sinking Fund of 1802. 
 
 To remedy these defects Gallatin made recom 
 mendations which were embodied in the law of April 
 29, 1802. The object of this law was to make as 
 secure a provision for the whole public debt, as the 
 law of 1795 had made for the six per cent, and 
 deferred stocks. It reorganized the sinking fund 
 by adding to it : (1) The funds appropriated for inter- 
 
64 Sinking Funds. [374 
 
 est on the debt ; (2) enough of the revenues to bring 
 the whole up to $7,300,000. 
 
 An annual payment of $7,300,000 was vested in 
 the commissioners of the sinking fund for the entire 
 debt service. All payments on account of the debt 
 in the way of interest, contingent charges, or reim 
 bursement, were under the superintendence of the 
 commissioners. These were to be made in the fol 
 lowing order : 
 
 First, Those payable from the old sinking fund. 
 
 Second, The interest and charges on the present 
 debt, or on future loans on behalf of the debt. 
 
 Third, Instalments due on existing debt. 
 
 Fourth, Purchases of existing debt. 
 
 The commissioners were empowered to distribute 
 the burden of the Dutch debt more evenly over the 
 eight years following by short reloans, and were 
 directed to apply the sum thereby disengaged to 
 redeeming the domestic debt. 
 
 This, then, is the gist of the enactment. After 
 repealing the obnoxious internal duties, the annual 
 revenue was estimated at $9,950,000. The annual 
 expenses, with close economy, were put at $2,650,000. 
 This left $7,300,000. This was but little above the 
 $7,000,000 actually required for the years 1802-3-4, 
 when the heaviest instalments of the Dutch 
 debt were to fall due. A like sum, though not 
 required, could still be profitably applied until the 
 year 1810, by paying off minor stocks such as the 
 four and a-half s, five and a-half s, navy sixes, bank 
 loans, and eight s. After 1810 so large a sinking 
 fund could be used only by buying three s on the 
 market. The law of 1802, then, signified the resolve 
 to continue the burden required for the next three 
 
375] Sinking Funds. 65 
 
 years, until the national debt should be fully paid. 
 But it signified more. In 1802, under the existing 
 law there would eventually have been carried to the 
 sinking fund a clear surplus of 81,200,000. And so, 
 perhaps, for succeeding years. But this annual sur 
 plus was, as we have seen, a precarious thing afford 
 ing no security to the public creditor, because contin 
 gent upon government expenses. This uncertainty 
 the law of 1802 remedied by anticipating the surplus, 
 and setting it apart to the sinking fund in advance 
 of all budgetary appropriations. 1 Hereafter all pay 
 ments for the debt up to $7,300,000 were to enjoy a 
 priority over current expenditures. The government 
 must support itself on the leavings of the sinking 
 fund. 
 
 The act of 1802 was strictly supplementary to the 
 plan of amortization adopted in 1795. It simplified 
 the existing system by rolling into one the batch of 
 special assets; it enlarged it by adding about $1,200,- 
 000 to its certain income; it modified it by turning 
 the interest appropriations into the sinking fund, at 
 the same time charging that fund with the entire 
 debt service. But not a single resource of the old 
 fund was deranged or altered. 2 
 
 Owing to the productiveness of the revenues, the 
 redemption of the debt was not checked by the neces 
 sity of providing for the $11,250,000 of six per cent, 
 stock created for the Louisiana purchase. The sink 
 ing fund was, in 1804, enlarged to $8,000,000 and 
 charged with $700,000 of new interest. 
 
 ir rhe civil list, however, had always a first lien on the revenue 
 for $600,000. 
 
 2 This same year one of the items constituting the old sinking 
 fund lapsed, owing to sale of the bank stock. 
 5 
 
66 Sinking Funds. [376 
 
 In 180G, owing to certain abuses in the land offices, 
 Congress repealed the old device of raising the value 
 of government stocks by accepting them in payment 
 for public land. At the same time the sinking fund 
 commissioners were freed from certain hampering 
 restrictions regarding time and manner of purchas 
 ing the public debt, while the limiting par value of 
 three per cents was fixed at sixty. 
 
 From 1802 the revenues constantly exceeded 
 estimates, and, with an overflowing treasury, the 
 payment of the debt proceeded with unprecedented 
 rapidity. The eight million sinking fund was further 
 enlarged by surpluses, so that the payments on the 
 principal of the debt rose from about 3,207,000 in 
 1804, to 83,905,000 in 1805; to $4,828,000 in 1806; to 
 83,729,000 in 1807; and to 86,986,000 in 1808. It was 
 accordingly recommended byGallatin, and authorized 
 by the act of February 11, 1807, that the unredeemed 
 portion of the sixes, existing in the form of eight per 
 cent, annuities, be exchanged for a common six per 
 cent, stock, redeemable at will. The three per cents 
 also were to be converted at sixty-five into similar 
 stock. The object of this scheme was to enable the 
 sinking fund to continue its amortization without too 
 free a resort to the stock market. The operation was 
 only partially successful. 80,294,051.12 of "ex 
 changed sixes" were issued, but only 811,859,850.70 
 of the "converted sixes." Later, as we shall see, a 
 similar attempt was made, but with a different 
 purpose. 
 
 The Embargo, the Non-Importation Act, and the 
 disturbance of commerce by foreign restrictions, 
 shrunk the receipts frightfully in 1808, 1809, and 
 1810. It was even found necessary, in order to 
 
377] Sinking Funds. 67 
 
 maintain the sinking fund intact, to authorize, in 
 1810, a temporary loan from the United States Bank 
 of $2,750,000. The debt made and the debt paid were 
 both at six per cent., so the transaction was merely 
 nominal. The new debt was charged upon the sink 
 ing fund, and was paid off the next year. The oper 
 ation was in effect a partial suspension of amortiza 
 tion for one year. 
 
 In his report at the close of 1811, Gallatin reviews 
 the amortization since 1801. As the treasury was 
 now closing a debt-paying period and entering upon 
 a debt-creating period, it may be well to look back 
 over the fiscal operations, and note what impression 
 had been made on the debt. The inherited debt and 
 accrued interest to 1791 amounted, when funded, to 
 876,781,953.14. The Federalists in ten years reduced 
 this to $72,733,599, but added $7,193,400 of new stock, 
 mostly at eight per cent., thus bequeathing a burden 
 of $79,926,999 to their successors. Of this, Gallatin s 
 sinking fund extinguished $46,022,810 between 1801 
 and 1811. The purchase of Louisiana, however, 
 added $11,250,000 to the principal, so that on January 
 1, 1812, the public debt was $45,154,189, over thirty- 
 one millions less than the original Revolutionary 
 debt. 
 
 In 1801 there were twelve species of stock outstand 
 ing. Eleven years later there were only five kinds at 
 two rates of interest, viz.: three per cent, and six per 
 cent. From 1801 to 1812, the regular application of 
 $8,000,000 to the debt had been threatened, first with 
 dearth of redeemable stock, and later with dearth of 
 revenue, but each crisis had been met, so that the 
 operations of the sinking fund had continued unin 
 terrupted. The debt yet outstanding consisted 
 
68 Sinking Funds. [378 
 
 chiefly of the eight per cent, annuities, the practically 
 irredeemable three s, and the Louisiana stock not 
 payable till 1818. If no more debt were created, 
 there could be applied yearly till 1818 only $3,792,382 
 all told. The remaining 4,200,000 of the sinking 
 fund was not applicable to the debt, unless public 
 stock fell below a certain par fixed by the act of 
 1806. As long as this untoward event did not occur, 
 the surplus of the sinking fund was, by the law of 
 1802, available for current expenses. Should it occur, 
 the government would be obliged to revert to the 
 costly practice of buying stock and placing stock in 
 the same market at the same time. 
 
 The Sinking Fund during the War. 
 
 The war measures of 1812 included a loan of eleven 
 millions charged upon the sinking fund, an issue of 
 treasury notes at five and two-fifths per cent, interest 
 constituting a secondary charge on the sinking fund, 
 and a project to release the sinking fund from the 
 $1,570,000 annually due on the principal of the eight 
 per cent, annuities. As formerly, so now, the idea 
 was to convert the unpaid principal of these annui 
 ties into six per cent, stock. Had the project suc 
 ceeded the emancipation of the sinking fund from the 
 old debt would have been complete. As it was only 
 about three millions were exchanged, that is, less 
 than one-fifth of the whole. 
 
 There was paid out of the sinking fund during 
 1812 $4,710,954.39, of which $2,259,681 was applied 
 to principal of debt. The balance of the eight million 
 appropriation was applicable to the demands of the 
 next year. In 1813 there was paid out on account of 
 the sinking fund over eleven millions, used mainly 
 
379] Sinking Funds. 69 
 
 for redemption of treasury notes, repayment of tem 
 porary loans, and interest on the new war loans. 
 Purchases of stock amounting to $412,497 were also 
 made. In 1814 the sum expended for old debt, 
 interest of new debt, temporary loans, and treasury 
 notes, was 8,386,880. Of this, not over $1,475,000 
 was in payment of old debt. The sinking fund, then, 
 may be reckoned to have cost the government very 
 little during the war, thanks to the happy device of 
 charging upon the sinking fund each year the pay 
 ment of some millions of treasury notes and temporary 
 loans. On this matter Professor H. C. Adams 
 remarks: 
 
 " During the continuance of the war there was no 
 redemption of permanent indebtedness, except such 
 as had been entailed by the law of 1795. We find, 
 in the financial administration of this war, no appli 
 cation of the pernicious theory that every loan 
 should be accompanied by the means of its own 
 extinction." 1 
 
 Meanwhile, war debt was being rapidly piled up 
 on the sinking fund. On December 31, 1815, the 
 debt was estimated as follows : 
 
 Old debt remaining $ 39,905,183.66 
 
 Funded war debt 49,780,322.13 
 
 Treasury notes 18,452,800.00 
 
 Temporary loans 550,000.00 
 
 Total burden on the sinking fund 108,688,305.79 
 
 The sinking fund was at that time composed of 
 
 Interest on stock held by commissioners, 1,969,577.64 
 
 Receipts from the public lands 800,000.00 
 
 From duties 5,230,422.36 
 
 Sinking fund $8,000,000, 00 : 
 
 1 "Public Debts," p. 268. 
 2 Finance, Vol. II., p. 916. 
 
70 Sinking Funds. [380 
 
 On September 30, 1815, the total burden on the 
 sinking fund had increased to $119,635,558.46. 
 
 All the loan acts of the war had contained a para 
 graph directing the commissioners to pay the interest 
 and reimburse the principal when due, and to pur 
 chase the stock at or below par whenever they should 
 see fit. The faith of the United States was invaria 
 bly pledged to make up any deficiency in the appro 
 priation for the debt. Owing to great financial stress 
 and general failure of loans, the loan act of Novem 
 ber 15, 1814, in addition to the above, gave the 
 further assurance that special funds would be added 
 to the sinking fund appropriation, during that ses 
 sion of Congress, for the loan then authorized, and 
 that the sinking fund would be permanently in 
 creased, so as to extinguish the public debt. 
 
 Reorganization. 
 
 At the close of the war, it was evident to all that 
 a sinking fund of 88,000,000 could never support the 
 funded debt and, at the same time, discharge punc 
 tually the whole principal and interest of annual 
 issues of treasury notes, amounting to eight or nine 
 million dollars. The vigorous head of the treasury, 
 therefore, proposed : 
 
 First That the sinking fund be relieved of the 
 treasury note debt by funding the notes; 
 
 Second That the sinking fund be applied first to 
 paying the old eight per cent, annuity; 
 
 Third That it be applied next to discharge of the 
 temporary loans of the war; 
 
 Fourth That it be. applied then to the interest on 
 the war loans; 
 
 Fifth That the surplus be applied in purchasing 
 the war debt. 
 
381] Sinking Funds. 71 
 
 In the matter of funding the treasury note debt, 
 Congress followed Dallas advice. The act of 
 March 3, 1815, authorized a loan of $18,452,800,- 
 that being the sum required to cover the outstanding 
 notes. Under this authority, a loan for twelve 
 millions was opened. Six per cent, stock to the 
 amount of $12,288,147.56 was issued, which sufficed 
 to absorb about $11,700,000 of treasury notes. 
 
 In his report of December, 1815, Dallas estimated 
 that, with treasury notes and temporary loans out of 
 the way, the regular charge on the sinking fund for 
 interest and obligatory reimbursement of the old 
 debt would be $7,660,000. This left only $340,000 
 annually applicable to the principal of the new war 
 debt. This scale of reduction was evidently incom 
 mensurate with the national ability. So greatly had 
 the debt risen that, in order to provide for it as 
 generously as Gallatin s sinking fund of eight mil 
 lions had provided for the eighty-five million debt of 
 1804, the annual appropriation must be increased to 
 $10,500,000. Dallas, however, proposed to add but 
 two millions to the existing appropriation. The 
 sinking fund thus reorganized would extinguish the 
 public debt in about eighteen years. 
 
 A year later, Secretary Crawford urged similar 
 measures upon Congress. On these recommenda 
 tions, the committee of ways and means submitted 
 a report on January 14, 1817. They observed that 
 the reorganization of the sinking fund had been 
 deferred till the revenue system should receive a 
 permanent form, and the peace footing should be 
 determined. Meanwhile, no time had been lost, for 
 the surplus revenues had been used in reducing the 
 floating debt (arrearages of military expense), and re- 
 
72 Sinking Funds. [382 
 
 tiring the unfunded treasury notes. Including these 
 classes of debt, the sum applied to amortization 
 ^during 1816 was no less than 824,000,000, while a 
 balance of ten millions remained in the treasury. 
 The overflowing revenue, which made possible so 
 large a reduction in one year demonstrated, to the 
 satisfaction of the committee, that the resources of 
 the nation were ample to effect within a reasonable 
 length of time the extinguishment of the whole debt. 
 
 "As the numerous and often incongruous pro 
 visions of the present laws in relation to the sinking 
 fund require a general revision," the committee 
 reported certain propositions. They recommended a 
 permanent sinking fund appropriation of 810,000,000, 
 and proposed also an additional special appropriation 
 for 1817 of 80,000,000, together with 4,000,000 more, 
 to be considered as an advance on account of the 
 regular payment of the succeeding year. This was 
 in view of the ample revenues of 1817, and of the 
 fact that there is a disadvantage in keeping idle in 
 the treasury money destined to pay the principal of 
 a debt. The committee urged the further appropri 
 ation to the sinking fund of all surpluses above 
 $2,000,000. 
 
 In adding to the amount of the sinking fund, it 
 appeared wise to simplify its operations. There was 
 then standing on the books of the treasury and 
 credited to commissioners of the sinking fund 
 nearly 834,000,000 of stock of fourteen different 
 descriptions, and bearing seven different rates of in 
 terest. On this stock interest was supposed regularly 
 to accrue and to be paid, with no other effect than 
 that of adding to the labors of those who wished 
 to understand the accounts of the government. The 
 
383J Sinking Funds. 73 
 
 committee proposed, therefore, that all certificates 
 of public debt, when redeemed, should be destroyed. 
 It is true the proposed change would not effect the 
 diminution of the debt, but "if the saving of trouble 
 in making up the accounts be nothing, it is yet im 
 portant that their state be such as to admit of being 
 easily and generally understood, and that what is in 
 itself plain should not be obscured by the introduc 
 tion of a useless fiction." 
 
 The Sinking Fund of 1817. 
 
 The bill reported by the committee was passed. 
 By the act of March 3, 1817, the government after 
 having withdrawn its circulating notes, liquidated 
 its floating indebtedness, revised the revenue system 
 and fixed the peace establishment redeemed the 
 promise given in the loan acts of the war. This 
 time the reorganization of the sinking fund was 
 far more radical than any former change. The first 
 clause of the act repealed all previous acts of Con 
 gress making provision for the service of the debt. 
 All the other enlargements had kept the existing 
 fund as a nucleus and built up around it a new fund 
 by additional appropriations 1 . This act was the first 
 act that swept away all previous make-up of the 
 fund, and started with clear ground. It simply 
 vested in the commissioners, for the service of the 
 debt, an annual sum of ten millions from the perma 
 nent revenues of the government import duties, 
 internal taxes and public land sales. In addition to 
 this fixed payment, there was appropriated for 1817 
 a sum of nine millions and, if deemed expedient by 
 the Secretary of the Treasury, a further sum of 
 four millions on the payment of 1818. Furthermore, 
 
74 Sinking Funds. [384 
 
 any yearly surplus above two millions was to be paid 
 over to the commissioners. 
 
 The application of the sinking fund thus rehabili 
 tated was to conform to the previous engagements 
 with the public creditors. When in any year the 
 sinking fund should exceed the sum directly appli 
 cable to the service of the debt, the surplus should 
 be applied to the purchase of stock at the market 
 price, providing it did not exceed the following : 
 for threes 05, for sixes par, for sevens no higher in 
 proportion than for the sixes. In time of war any 
 surplus, beyond the payments on account of the debt 
 called for by the public engagements, might be 
 applied to the public service. 
 
 The act, furthermore, directed that all the accum 
 ulated certificates of stock, as well as those there 
 after to be acquired, were to be cancelled or destroyed, 
 and "no interest was to be-considered as accruing on 
 them." 
 
 In the redemption plan of 1817 the sinking fund 
 reaches almost the extreme of simplicity. It is true 
 the payment on behalf of the public debt still went 
 to a separate account, and was payable in theory to 
 a special board. But the cunning and complicated 
 apparatus of Hamilton and the English financiers 
 had been done away with. There was no fixed pay 
 ment on account of the principal of the debt, no 
 inviolable appropriation, no sinking fund composed 
 of specific items of revenue, no contract with the 
 creditors, no automatic purchasing machinery, no 
 borrowing on behalf of the fund, no hoarding of paid 
 off debt, and no payment of interest thereon. Sim 
 plicity and common sense had triumphed. 
 
385] Sinking Funds. 75 
 
 Unlike the earlier enactments of that of 1817 con 
 tained no limitation to existing debt, such as had so 
 often spoiled the plans of redemption. The new sink 
 ing fund was not, however, applicable to the service 
 of all the public indebtedness. Besides the tempor 
 ary loans and treasury notes charged upon other 
 appropriations, there were $7,000,000 of five per 
 cent, stock exchanged for shares of the new United 
 States Bank, of which the interest and principal 
 would be more than defrayed, it was estimated, by 
 the dividends, or by the sale of the shares ; and over 
 four millions of non-interest bearing Mississippi 
 stock, issued to meet the Yazoo claims, and charged 
 upon the receipts from Mississippi lands. This left 
 the burden on the sinking fund about one hundred 
 and ten millions. + 
 
 The history of the sinking fund of 1817 is not 
 eventful. During 1817 there was applied to the debt 
 $25,423,036.12, and in 1818 $21,296,306.04. But dur 
 ing the years following the sum applied to the debt, 
 owing to the reaction from the prosperity of 1816, fell 
 short by nearly twelve millions of the amount appro 
 priated by law. The total deficiency of $3,000,000 
 for the first seven years was made up in following 
 years. This deficiency was, however, partly due to 
 the fact that most of the debt was not yet reimbursa 
 ble, the twelve-year term of the war loans being yet 
 unexpired. The application of money to the d^ebt 
 was, however, furthered by a clause in the bank 
 act of 1816. This provided that $21,000,000 of the 
 capital stock of the United States Bank might be 
 subscribed in public stock, which the government 
 should have the privilege of buying of the bank at 
 the rate permitted by law. 
 
?G Sinking Funds. [386 
 
 In the years 1825-1828 the war debt fell due. In 
 1822 and the years following three attempts had 
 been made to refund a part of this debt at a lower 
 rate, in order to save interest and to distribute the 
 burden of payment of the four years over the three 
 following years, when no part of the debt fell due. 
 The attempts failed almost entirely, because the rate 
 of interest (four and a-half per cent.) offered by the 
 government was too low. As the debt was not thus 
 distributed, the government adopted the plan of 
 partial payments. From 1825 the redemption of the 
 debt proceeded with great rapidity, so that by the 
 close of 1834 the whole mass was practically extin 
 guished. Small amounts of stock were still out 
 standing, but their payment was provided for. The 
 duties of the commissioners of the sinking fund 
 ceased, and the Secretary of the Treasury was charged 
 with further payments on account of the debt. 
 
 This closes our chapter of experience with a per 
 manent commission. Invented in an era of personal 
 government, cabinet intrigue, and limited publicity, 
 as a visible and imposing sign that the public faith 
 was beyond the whim of a minister or the cavil of a 
 creditor, it had no place or use in the system we 
 developed. It was but a needless administrative 
 appendix that, once imported, continued with us only 
 by % sufferance, and that a later debt epoch has not 
 revived. With the modern budget and monthly 
 debt statement, it needs no special board with sep 
 arate accounts to enable the public to follow the 
 course of amortization. 
 
 Debt Payment Between 1837 and 1862. 
 Between 1837 and 1862 lies a period of little fiscal 
 interest, separating by a quarter of a century the 
 
387] Sinking Funds, 77 
 
 two great debt-paying epochs of our history. This 
 period exhibits a series of fluctuations of expense, 
 revenue and debt, too rapid to permit striking into 
 any settled policy, such as prevailed during the 
 eleven years after 1801 or the seventeen years fol 
 lowing 1817. 
 
 After the crash of 1837 constant deficits led the gov 
 ernment to issue treasury notes. Nothing was done 
 for their redemption, so they were annually paid by 
 new issues. At last these piled up till, in 1841, Con 
 gress was forced to fund them, and thus found a new 
 public debt. As usual, the faith of the United States 
 was pledged to the redemption of the new bonds. The 
 next year the loan was extended and enlarged, and 
 based in the old-fashioned way. So much of the 
 import duties as should be necessary were pledged to 
 pay the interest and redeem the stock. Under these 
 acts $21,000,000 of funded debt were created. 
 
 When, in 1844, prosperity returned and a surplus 
 appeared in the treasury, Secretary Bibb came for 
 ward with a plan for a sinking fund. From the midst 
 of an extraordinary mass of platitudes, Bibb declares 
 that excess of revenue above expenditure is the only 
 real sinking fund, and that "the lessening of expense 
 and the increase of revenue are the only means by 
 which the sinking fund can be enlarged." After 
 reviewing the history of our former debt payment, he 
 suggests on annual appropriation of two millions for 
 the debt service. At the same time, owing to the 
 uncertain yield of the revenues, he favors the setting 
 aside of casual surpluses rather than a fixed sum, and 
 recommends the establishment of a sinking fund 
 commission. The chief loans were to fall due in 1853 
 and 1863. The secretary, therefore, wants a sinking 
 
> Sinking Funds. [388 
 
 fund adquate to pay the interest, "to purchase so 
 much in each year of the principal, as shall be offered 
 for sale at reasonable rates for certificates of stock, 
 and to amount, in the succession of years which must 
 elapse before they will be redeemable by the terms of 
 contracts, to a sufficiency to pay the principal when 
 the time for redemption shall arrive." The fault may 
 lie in the syntax, but at first blush this sentence would 
 seem to show that the secretary did not understand 
 how uniform is the action of a combined sinking fund. 
 
 With the advent of the Mexican war came a new 
 growth of debt. The loan act of 1847 authorized 
 the issue of twenty-three millions of twenty-year 
 stock. To the service of this loan were pledged the 
 proceeds of all sales of public lands after January 1, 
 1848. The balance left after paying interest was to 
 be used in buying bonds at their market value, if not 
 above par. For purchase of the sixteen million loan 
 of the next year the Secretary of the Treasury was 
 authorized to use any surplus funds. 
 
 The excess from the sale of public lands set apart 
 for reducing the stock of 1847, could not be used in 
 buying stock above par. As the market price was 
 above par, the funds had to lie idle in the treasury. 
 Secretary Walker, therefore, sought and obtained 
 authority to purchase at a premium. This was found, 
 however, a dear way of sinking the debt. During 
 1851 and 1852 the average price paid for government 
 bonds was 113, and the total sum expended in pre 
 miums was over 8300,000. The Secretary of the 
 Treasury accordingly suggested that, besides letting 
 the surplus accumulate in the treasury, or buying 
 stock with it at 113, there was still the third alterna 
 tive of investing it in sound state securities, and 
 
389J Sinking Funds. 79 
 
 holding them as a sinking fund until the government 
 could redeem its stock at par. Congress mindful of 
 the fate of the Smithsonian fund declined to risk the 
 public money in state bonds. 
 
 The Sinking Fund of 1862. 
 
 With the outbreak of the Civil war begins the final 
 period of sinking fund history. In the earlier part 
 of this period we find a return to Hamiltonian princi 
 ples. Secretary Chase in his report of July 4, 1861, 
 advocated the immediate establishment of a sinking 
 fund for the expungement of the war loans. The 
 fruit of his policy was the clause in the act of 
 February 25, 1862. 
 
 This act, after authorizing a serious appeal to 
 credit, undertook to establish the debt on a secure 
 basis. The coin paid for duties on imports was to be 
 applied, first, to the payment of interest on the bonds 
 and notes of the United Stats. It was then to be 
 applied "to the purchase or payment of one per 
 centum of the entire debt .... to be made within 
 each fiscal year, which is to be set apart as a sinking 
 fund, and the interest of which shall in like manner 
 be applied" .... The residue of customs receipts 
 was to be paid into the treasury. The language of 
 this act is plain. The provision was made part of 
 a loan act and was to apply to future as well as to 
 existing debt. In view of this, the words of a writer 
 in the Bankers^ Magazine seem warranted. 
 
 "It was a formal notice to all persons, who should 
 loan to the government, of its future intention, and 
 constitutes a contract as binding as any can be made 
 between it and the persons who have loaned to the 
 government since that date." 1 
 > P- 725. 
 
 UNIVERSITY 
 
80 Sinking Funds. [390 
 
 Notwithstanding the law of 1802, there was no 
 compliance with its sinking fund provision during 
 the war. At the close Secretary McCulloh, who 
 resembled Gallatin as Chase resembled Hamilton, 
 ignored 1 the law of 18(52 and proposed a sinking fund 
 similar to that of 1817. He estimated that a yearly 
 appropriation to the debt of 200,000,000 would 
 discharge the whole in about thirty years. The 
 proposal was not accepted, and during his adminstra- 
 tion the treasury applied to the debt whatever funds 
 were available, without reference to the sinking 
 fund. As the actual reduction was far greater than 
 that required by law, nobody complained. 
 
 The sinking fund provision of 1862 seems to have 
 been discovered by Secretary Boutwell. In his first 
 report he announced that he had purchased twenty 
 millions of bonds for the sinking fund. He had 
 made further purchases, which he held as a special 
 fund subject to the action of Congress. He recom 
 mended that such extra purchases be added to the 
 sinking fund until it equalled what it would have 
 been, if the law had been complied with from the first. 
 
 In the great funding act of July 14, 1870, reor 
 ganizing the public debt, it was provided that all 
 bonds applied to the sinking fund be recorded, can 
 celled, and destroyed, and that a sum equal to the 
 interest on all bonds belonging to the sinking fund, 
 be included in the yearly amortization. Heretofore 
 the heads of the treasury had bought bonds, even 
 beyond the requirement of the sinking fund. This 
 action was legalized by a clause authorizing the 
 secretary to redeem the five-twenties with any coin 
 which he might lawfully apply to that purpose. 
 
 Repoit of 1863. 
 
391] Sinking Funds. 81 
 
 In 1873 the great crisis dried up the sources of 
 revenue seriously and made it impossible to meet all 
 claims upon the receipts. It is possible that, if Sec 
 retary Boutwell had been in office, there would have 
 been a rigid adherence to the strict letter of the law 
 of 1862. Under Secretary Bristow the law was prac 
 tically construed to suit the emergency. It was 
 announced that for 1874-5 there would be a surplus 
 revenue of nine millions to be applied to the sinking 
 fund. As under law over thirty-one millions was 
 required for the fund, there would be a deficiency 
 for the year of over twenty-two millions. This was 
 making the sinking fund the residuary legatee of 
 the revenues. 
 
 In his report for 1875 Secretary Bristow acknowl 
 edged that the sinking fund payment was secondary 
 only to the interest on the public debt, and took 
 precedence of all other appropriations. As some had 
 asserted that the excess payments of former years 
 excused the lapse of the sinking fund payment when 
 need arose, the secretary took occasion to declare 
 that the statute imposed a duty to be performed 
 annually, and that purchases must be made within 
 each fiscal year. The secretary explained the cessa 
 tion of bond purchases by the fact that bonds could 
 not be bought at par, while he was forbidden by law 
 to pay more. This dead-lock, however, had been 
 broken by the law of March 3, 1875, which author 
 ized the secretary to obtain bonds for the sinking 
 fund by calling in and redeeming the five-twenties. 
 
 As the deficiency in the revenues continued, the 
 next secretary, Morrill, thought fit to present a view 
 of the operations of the debt in toto. From his cal- 
 
 
 
82 Sinking Funds. [392 
 
 dilations he concluded that the public creditor had 
 no ground of complaint. 
 
 "The terms of the law of February 25, 1862, 
 required that by the operations of the sinking fund 
 account, the public debt should be reduced in the 
 sum of $433,848,215,37 between July 1, 1862, and 
 the close of the last fiscal year. A reduction has 
 been effected during that period of $656,992,226.44, 
 or 8223,144,011.07 more than was absolutely required. 
 
 "It can therefore be said, as a matter of fact, that 
 all of the pledges and obligations of the government 
 to make provision for the sinking fund and the can 
 cellation of the public debt have been fully met and 
 carried out/ 
 
 Liberal Interpretation. 
 
 The sinking fund first rose into prominence dur 
 ing the preparations for specie resumption. The act 
 of 1875 permitted the sale of bonds, to procure the 
 stock of gold necessary for resumption. A compli 
 ance with the letter of the statutes would lead to the 
 practice of redeeming and borrowing at the same 
 time. Sound finance required that, in such a case, 
 the government should cease buying bonds for the 
 sinking fund, and let the cash destined for that 
 purpose accumulate in the treasury, awaiting the 
 day of resumption. It was accordingly urged, and 
 with reason, that the claims of the sinking fund 
 should be suspended. 
 
 This was not done, but something similar was 
 done. The debt to which a yearly one per cent, pay 
 ment was pledged included notes as well as bonds. 
 It might, therefore, he held lawful to redeem green- 
 deport of 1876. 
 
393] Sinking Funds. 83 
 
 backs, or even "shinplasters," for the sinking fund, 
 in place of bonds, and thereby lesson the mass of 
 paper to be confronted on January 1, 1879. Accord 
 ingly under the law or April 17, 1876, $7,000,000 of 
 fractional currency were credited to the sinking 
 fund at five per cent, interest. Similarly $8,000,000 
 of greenbacks were added under a clause in the 
 resumption act. 
 
 Since the accession of Senator Sherman to the 
 treasury portfolio a construction of the laws of 1862 
 has prevailed which, however consonant with com 
 mon sense and sound finance, is irreconcilable with 
 the theory that the sinking fund then established is 
 part of the contract with the public creditors. In 
 his report for 1879 the secretary said : "These acts 
 (of 1862 and 1870) are regarded as imposing upon 
 the secretary the duty of providing for the sinking 
 fund out of the surplus revenues of the govern 
 ment." The new construction was very apparent in 
 a Senate debate, in 1884, over a proposition to reduce 
 the sinking fund. Senator Plumb regarded the 
 sinking fund as merely a matter of bookkeeping. 
 " The sinking fund has simply been some 
 thing represented by certain entries on the books of 
 the treasury, but nothing in the vaults of the treas 
 ury." 
 
 Senator Sherman stated that, in 1873 and there 
 after, the government did not pay one-fourth or one- 
 fifth of the sinking fund. In 1877 and the follow 
 ing years, surpluses appeared and much more was 
 paid than the sinking fund required. The question, 
 then, is, Has the United States, which has pledged 
 its faith to pay a certain sum annually, a right to 
 apply the excess payment of one year to make up the 
 
84 Sinking F^mds. [394 
 
 deficiency of another year ? The senator regarded 
 it as a compliance with the law when the govern 
 ment does substantially what it agreed to do. No 
 man could question the faith of the United States 
 because it was for three or four years unable from 
 its current revenues to pay the sinking fund, pro 
 vided it has, on the whole, more than made good its 
 promise. But while the senator regarded the sink 
 ing fund payment as justly amenable to the financial 
 demands of the country, he deemed it inconsistent 
 with honor and public faith to alter or invade the 
 sinking fund by law. Temporary exigency might 
 suspend amortization without dishonor, but conscious 
 policy never. 
 
 Conclusions. 
 
 Our conclusion, then, is that the debt has been 
 reduced, but not with the steadiness and automatic 
 regularity contemplated by the terms of the law of 
 1862. Though the total reduction has exceeded the 
 requirements of the law, yet so sensitive have the 
 yearly appropriations been to the condition of the 
 treasury, that it is doubtful if they could have con 
 formed more closely to the varying financial situa 
 tion, had there been no law at all. 
 
 What the secretaries have done and they could 
 do no more was simply to amortize with the annual 
 surplus, be it large or small. It is hard to see, there 
 fore, wherein our sinking fund law, thus adminis 
 tered, differs in effect from a law directing the sec 
 retary to use surplus funds to pay the debt. If 
 Congress had ordered the law to be administered so 
 that the sinking fund appropriation should enjoy a 
 priority over other appropriations, not permanent, or 
 
395] Sinking Funds. 85 
 
 regular, the law would have meant something. In 
 that case a shrinkage in the revenues would have 
 meant a deficiency in the funds for public works, 
 and not in the funds for the public debt. We should 
 not then be placed in the anomalous position of 
 granting to gratuitous appropriations like those of the 
 river and harbor bill, the preference at the counters 
 of the treasury over a matter of contract like the 
 sinking fund appropriation. 
 
 It seems, then, from our last experience, that, 
 however solemnly a sovereign state may confer upon 
 the principal of the public debt the first lien upon the 
 revenues, considerations of practical policy will lead 
 that state to relegate the principal of the debt to the 
 frontier of public obligation, there to be abandoned, 
 should the national income for a time retreat within 
 narrower bounds. 
 
III. 
 
 THE THEORY OF AMORTIZATION. 
 
 We are in a position, now that our historical sur 
 vey has supplied us with a sufficient stock of prece 
 dents, to enter upon the theory of amortization, and 
 to discover the relation of the various species of 
 sinking fund to each other, and to their common 
 function. Simple as the thing may seem after our 
 comparative study, no financial task has so befooled 
 statesmen and led to costly mistakes, as the sinking 
 of public debt. In England, the pioneer in modern 
 finance, the search for the best way of amortization 
 has strained the powers, and taxed the ingenuity, of 
 the best heads for over a century. And yet it has 
 been demonstrated that England, during the Napo 
 leonic wars, lost by her theory of amortization a sum 
 greater than the debt left us by the Revolution. In 
 fact, it is only within the last two decades that the 
 practice of the great financial powers has approached 
 such an unanimity, as encourages the student fear 
 lessly to frame a theory of amortization. 
 
 Our Theory Concerned with Settled Policy. 
 The first thing to note is, that whatever theory 
 there may be relates to the sinking of funded, 
 consolidated, or permanent debt. The theoretical 
 side of amortization is principally concerned with 
 fixed policy; and floating debt, such as treasury notes, 
 exchequer bills, bons du tresor, is not, and should not 
 become the object of a permanent provision. Good 
 financiering requires that a floating debt be either 
 paid off or funded. We have, it is true, occasional 
 redemption funds and the rather nondescript caisse 
 
397] Sinking Funds. 87 
 
 d amortissement of Napoleon I, but their theoretical 
 import is too slight to require treatment. 
 
 Similarly we are not concerned with any temporary, 
 hand-to-mouth handling of a time debt. When leg 
 islation busies itself solely with the present, leaving 
 policy free to be continually adjusted to circum 
 stances, hindsight replaces foresight. It is in the 
 remote consequences of a settled fiscal policy that 
 the perplexing problems of the financier lie. 
 
 The Meaning of the term "Sinking Fund." 
 
 Our theory has to do with sinking funds. But it 
 is proper to note that this word is ambiguous. The 
 word "fund" was formerly used to designate a num 
 ber of items of revenue grouped together and regu 
 larly devoted to a specific object. The "sinking 
 fund" was that group of revenues regularly applied 
 to the principal of the debt. The yearly yield of this 
 group was the "annual sinking fund." 
 
 Now let this appropriation be conceived, not as 
 applied directly to the debt, but as invested in active 
 securities destined ultimately to redeem the debt. In 
 that case this accumulation of securities might be 
 regarded as, properly speaking, the sinking fund. 
 And this, even if the securities invested in be the 
 very bonds that the sinking fund is destined to pay 
 off. By the hocus-pocus of legal fiction, the still 
 active public securities acquired, may be, and actu 
 ally were, regarded as the sinking fund for their own 
 redemption. 
 
 It is plain that, with the abandonment of this 
 system in this country in 1817, and in England 
 in 1829 the term "sinking fund" would tend to 
 revert to its original sense. But meanwhile, the old 
 
88 Sinking Funds. [398 
 
 habit of devoting certain revenues to particular uses 
 had been broken off. Hence, as there was no well- 
 defined fund to which the word might attach, "sink 
 ing fund" would come to mean the system, policy, or 
 enactment, under which money is regularly applied 
 to the principal of a debt. And finally the word 
 would frequently be used to describe the payment 
 itself, i. e., the payment made in behalf of the prin 
 cipal of a debt under a general law. This is why the 
 appropriation of the surplus of 1790 to the purchase 
 of stock did not, strictly speaking, found a sinking 
 fund at all. It was only in the clause permitting 
 loans that any hint of continuous amortization 
 appeared. 
 
 It is to be kept in mind that the discussion turns 
 on the mode of applying money to the extinguish 
 ment of a debt. In our analysis we cannot ask 
 whether the moneys applied come from taxation, or 
 from new loans. The source of the appropriation, 
 though of the highest practical importance, cannot 
 furnish the ground of classification. 
 
 Bearing this in mind, it is proposed in the discus 
 sion to justify the following analysis: 
 
 f f I accumulating 
 
 proportional-^ 
 
 ( simple 
 
 f ( certain 
 
 Kegular I annuities < life 
 
 appropriation { I premium bonds 
 
 I nrnirroaaivA I Combined flllld 
 
 progressive 
 
 Amortization by -1 
 
 | formal sinking fund 
 
 I specific funds 
 
 If specific income 
 flv . J fixed proportion 
 
 i sinking fund appropriation 
 fixed sums 
 
 ( Instalment. 
 
 Contingent ( of intentional surplus 
 appropriation < 
 
 ( of casual surplus 
 
399] linking Funds. 89 
 
 Contingent Amortization. 
 
 As the simplest reduction of a debt takes place 
 by casual appropriations, so the simplest sinking 
 fund is the permanent appropriation of casual, 
 budgetary surpluses. If these surpluses are really 
 casual, there is no guarantee that they will more 
 than cover, in the long run, the casual deficits. But 
 if these latter were to be covered, not by casual sur 
 pluses of succeeding years, but by being given a 
 place within the next budget, it is possible that such 
 a sinking fund might really yield something. In 
 these days of close estimates, however, it can not 
 be depended upon for anything effective. 
 
 The second type of sinking fund is the per 
 manent appropriation of intentional surpluses. 
 This species is well illustrated in the English " Old 
 Sinking Fund." In 1828, after a parliamentary 
 commission had announced the bad results of Pitt s 
 sinking fund, the reaction against inviolable appro 
 priations was so strong that Parliament went to the 
 extreme of laxity with the payment of the debt. 
 Bitter experience had taught that a sinking fund 
 should be suspended when the necessary revenue is 
 not forthcoming. Pressing the argument further, it 
 was concluded that, as it was impossible to escape 
 an occasional deficit year, the whole system of regu 
 lar amortization ought to be discarded. Parliament 
 could escape all the dangers and secure all the 
 benefits of a sinking fund simply by devoting any 
 net surplus that might arise to the extinguishment 
 of the debt. This was done, and Parliament con 
 tented itself with recommending that, in making up 
 the budget, the Chancellor of the Exchequer plan 
 for a surplus of at least three millions. As a result 
 
90 Sinking Funds. [400 
 
 of thus vacating responsibility, the surplus soon 
 dwindled to as many hundred thousand, and the 
 policy of debt extinction languished. Ministers of 
 finance preached to willing ears the doctrine that 
 it is better to "let money fructify in the pockets of 
 the people," than to tax it out and thereby stop the 
 interest on consols. 
 
 At the same time, the monied classes who with 
 clearer vision saw that taxation is, in fact, largely 
 compulsory capitalization strenuously opposed any 
 rapid debt payment that would lessen their dividends 
 by diluting the fund of national capital with a stream 
 of state-collected earnings. As a result, one min 
 ister after another preferred to remit taxes, rather 
 than incur the displeasure of the people and the 
 hostility of the creditor interests. Between 1829 and 
 1869, the clear surplus applied to the British debt 
 averaged not 3,000,000, but 760,000. 
 
 Experience, hence, seems to show that any scheme 
 of amortization, not backed by the utmost sanction 
 of legislative enactment and the firmest pledging of 
 national honor, is liable to quick collapse. To ap- 
 priate to the national debt all the annual surpluses, 
 and then to charge the ministry to see to it that there 
 be a surplus, is to shift great responsibility to weak 
 shoulders. To leave the matter of a surplus to the 
 decision of a ministry is to put the policy of paying 
 a debt at the most exposed point in goverment, subject 
 to the continual and combined assaults of special in 
 terests and party clamor for the remission of taxes. 
 Rarely, indeed, will the policy of high taxes, to pay 
 a debt, be steadily supported by public opinion, at 
 every moment and on every occasion. At the close 
 of the Civil war, we declared we would pay off our 
 
401] Sinking Funds. 91 
 
 debt within a generation. It is true fulfillment has 
 not lagged far behind promise, but it is doubtful 
 whether our policy of rapid amortization would have 
 been persevered in so well, if our debt had been paid 
 with taxes as such. It is perhaps, the pleasing con 
 sciousness that our magical protective tariff has 
 enabled us to saddle our debt on the foreign manu 
 facturer, that has held us to the payment of nearly 
 two billions. 
 
 Uniform Amortization. 
 
 The next type is the fixed sinking fund, by which 
 the payment of debt is made the object of intra- 
 budgetary provision. The difference between this 
 type and the former is that, while the former is 
 indirectly suspensible, the latter can be suspended 
 only by positive enactment. The former sinking 
 fund is practically suspended by any remission of 
 taxes, or by extra heavy appropriations for other 
 purposes. On the other hand, when the appropria 
 tion is regular and not contingent, it can be sus 
 pended only by overt act of the legislature, requir 
 ing with us the concurrence of the three legislative 
 branches. This genus of sinking funds, then, has 
 certain self-conserving properties that fit it for the 
 nation that is in earnest in its amortization. 
 
 At the same time, it should be borne in mind that 
 the regular appropriation introduced into the budget 
 is of a peculiar nature. It is not to be ranked with 
 other items of expense, so as to claim an equal right 
 with them to be satisfied out of a temporary loan, in 
 case of a deficit. For the sinking fund is peculiar 
 in that it has a function that is annulled, in so far as 
 money is borrowed for it. The function, for instance, 
 
92 Sinking Funds. [402 
 
 of a government gun foundry is the making of guns. 
 If money is borrowed for it, it still functionates 
 the guns are made. The function of a sinking fund 
 is to lessen debt. If money is borrowed for it, it 
 does not really discharge its function the debt is 
 not lessened. When the debt made and the debt 
 paid are equal the net performance of the sinking 
 fund is zero. This explains why a sinking fund 
 is not always to be placed on the same footing 
 with other appropriations. 
 
 Effect of Amortization in a Borrowing Period. 
 
 One of the most striking things in the history of 
 sinking funds is the willingness of financiers to 
 borrow with one hand, while paying unmatured debt 
 with the other. No matter how great the volume of 
 government paper that chokes the stock market, the 
 finance minister is always eager to maintain circula 
 tion in the stagnant mass by feeding in new stock at 
 one price, and buying out old stock at a higher price. 
 He justifies this seemingly reckless policy on the 
 ground that it inspires confidence, in both the money 
 lender and the public. This results, he insists, in a 
 higher price of stock, and so the government reaps a 
 kind of psychological premium on the excess of 
 stock sold over stock bought. 
 
 To the logician this is a hard saying. If the gov 
 ernment buys bonds for its sinking fund during a 
 loan period, just so much the more has it to borrow. 
 The supply of and the demand for capital are equally 
 increased. How, then, can the price be affected ? 
 Or, shall we admit that the extra and just-balancing 
 supply and demand, occasioned by keeping the sink 
 ing fund active, react upon and modify the former 
 
403] Sinking Funds. 93 
 
 supply of and demand for capital ? It may be that 
 stocks have not that automatic, unerring sagacity 
 ascribed to them. Both money-lender and taxpayer 
 are men, and can be deceived by painted canvas. 
 May it not be that the financier has yet something 
 to teach us about the theatrical element in practical 
 finance ? 
 
 England has touched the opposite extreme of opin 
 ion on this point. Formerly her statesmen argued 
 that a sinking fund, kept up even during a borrow 
 ing period, appreciated stocks by creating a steady 
 artificial demand for them. The parliamentary com 
 mittee of 1828, on the other hand, thought that such 
 a policy depreciates stocks by necessitating just so 
 much larger a loan than would otherwise be called 
 for. This criticism errs as much in one direction, 
 as the old theory did in the other. Perhaps it errs 
 even more. It is hard to see how the selling and 
 buying of equal amounts of similar stock, in the 
 same market, at about the same time, can alter the 
 price one way or the other. But if psychological 
 causes do alter it, the change will assuredly not be 
 in the direction of depreciation. 
 
 When Suspension Is Not Necessary. 
 
 Adopting the general rule, that a government 
 should not continue paying debt at a time when 
 deficits compel a resort to loans, it remains to inquire 
 what exceptions, if any, should be made. There 
 seem to be two cases in which a sinking fund need 
 not be suspended : 
 
 1. When amortization presents itself as a kind of 
 partial refunding. 
 
94 Sinking Funds., [404 
 
 2. When the moral loss from any deviation from a 
 settled financial policy would exceed the pecuniary 
 cost of adhering to that policy. 
 
 This is simply saying that finance is politics, as 
 well as science. But it is well to note here that the 
 concessions science needs make to politics, depend 
 much, in any concrete case, upon the kind of finan 
 cial doctrine that statesmen have been preaching 
 to the public and to its creditors. It was the 
 unsound doctrine, instilled by Pitt into the minds of 
 Englishmen in 1786, that made it bad politics to sus 
 pend the sinking fund in 1793 and thereafter. 
 
 Forms of Uniform Amortization. 
 
 The fixed appropriation sinking fund may be real 
 ized in three distinct forms. There may be periodi 
 cally applied to the principal of the debt a fixed sum, a 
 fixed proportion of the nominal capital of the debt, 
 or the income from a specified scource. 
 
 The fixed sum, moreover, may be applied under 
 the original terms of contract with creditors, or 
 under subsequent enactment. In the first case, we 
 have a debt made payable in instalments. This is 
 one of the most objectionable methods of extinguish 
 ing a debt, seeing that, in case of an emergency, it 
 forces upon the government the costly alternative 
 of paying old debts with the proceeds of dear loans 
 on the one hand, or of violating the public faith on 
 the other. In the second case, we have the ordi 
 nary, old-fashioned redemption appropriation. As it 
 is established subsequent to the contracting of the 
 debt it redeems, the government is free, if it has not 
 needlessly tied its own hands, to suspend the pay 
 ment, whenever the public interest requires it. 
 
405] Sinking Funds. 95 
 
 The second form of fixed regular appropriation 
 the setting aside of a definite proportion, instead of 
 a definite sum is adopted when the total debt 
 comprehended in the scheme of amortization is, as 
 yet, uncertain. Once this is ascertained, the pay 
 ment becomes definite, and operates uniformly on 
 the debt till its extinction. This was the form of 
 sinking fund maintained in Russia until 1860. Cer 
 tain loans were to be amortized by annual payments 
 of one, two, or two and one-half per cent, that is, in 
 one hundred, fifty, or forty years. 
 
 The third form the setting apart for the principal 
 of the debt of all income from certain specified 
 sources is characteristic of new countries in the 
 earlier stages of financiering, or of nations threatened 
 with disaster to public credit. Formerly it was 
 maintained in France and England, and we have 
 seen how, step by step, the United States was forced 
 into the same policy. It is still maintained in such 
 countries as Austria, Hungary, Roumania, and 
 Servia. It is a survival of the time when general 
 national credit was unknown, and loans were raised 
 by pledging specific funds to pay interest and prin 
 cipal. As the specific revenue sinking fund is char 
 acteristic of an inferior national credit and an unde 
 veloped fiscal system, it is often incorporated into 
 the act authorizing a loan, with a view to inspiring 
 confidence in lenders. When thus established the 
 sinking fund is inviolable, seeing that the specified 
 revenues are not only appropriated, but even mort 
 gaged beforehand, to the redemption of the debt. 
 Moreover, as the interest of a loan should rest upon as 
 sound a guarantee as does the principal, it is usual to 
 pledge specific revenues to the general debt service, 
 
96 Sinking Funds. [400 
 
 both for interest and for principal. In this case, as 
 we shall see, amortization becomes progressive. 
 
 The merits of the general type of sinking fund we 
 have just been considering, over the contingent appro 
 priation are, that it is really efficient, and that it 
 may not be suspended without special action. But, 
 nevertheless, the fixed sinking fund has a grave 
 defect. The appropriation, as we have seen, is defi 
 nite and constant. But as its action periodically 
 extinguishes some part of the debt, and thus stops 
 the interest thereon, it follows that the general inter 
 est charges must decline. The debt service, hence, 
 becomes a troublesome variable in the budget, that 
 calls for a perpetual tinkering of the revenue system 
 and a continual re-adjustment of receipts to expendi 
 tures. 
 
 Besides this practical inconvenience, the fixed 
 sinking fund puts the heaviest burden just at the 
 beginning of amortization. So against this policy it 
 might be urged : 
 
 1. That the simplest justice demands that a public 
 debt bear uniformly over a term of years. 
 
 2. That, as growth in population and wealth in 
 creases the financial power, a progressive debt charge 
 would come nearer to securing a just equality of 
 burden than a diminishing debt charge. 
 
 Progressive Amortization. 
 
 Now both these defects are, in a measure, remedied 
 by converting the fixed sinking fund into a progres 
 sive sinking fund. The characteristic of this type is, 
 that the total debt charge is kept constant, by causing 
 each annual payment to take up the slack that 
 
407] Sinking Funds. 97 
 
 previous amortization has left in the interest charge. 
 Each payment is made up of: 
 
 1. The original fixed payment. 
 
 2. The total annual interest released. 
 
 The progress, then, is not arbitrary, but perfectly 
 systematic. It is not as if the government had 
 decided to amortize $20,000,000 the first year, 
 $21,000,000 the second year, $22,000,000 the third 
 year, and so on. The growth is automatic depending 
 upon: 
 
 a The amount of the fixed payment. 
 
 b The rate of interest of the debt amortized. 
 
 If we let these two factors be represented by x and 
 y respectively, the progress of the amortization is 
 indicated by the mathematical formulae for an 
 annuity at compound interest. 
 
 End of 1st year x 
 
 " " 2nd year x -f x (1 + y} 
 
 " " 3rd year x + (a; + x (1 + y)) (1 + y). . . -etc. 
 
 The type of progressive sinking fund assumes four 
 forms, accordingly as it is the surplus of specific 
 interest funds, is formal, is combined, or is distributed 
 among annuities. As it is to this type that amortiza 
 tion tends to conform, and as its four forms are of 
 great historical importance, it will repay a careful 
 and detailed study. 
 
 The first form is the simplest and the earliest. We 
 are to conceive of a debt bottomed on certain specified 
 revenues yielding something more than the interest. 
 Suppose, now, that any annual surplus these revenues 
 may yield be applied to the payment of part of the 
 debt. Part of the interest will thereby be stopped, 
 and the surplus of the next year will be so much the 
 larger. In principle, then, this surplus sinking fund 
 7 
 
98 Sinking Funds. [408 
 
 is truly progressive, although its regularity of growth 
 is likely to be obscured by fluctuations in the annual 
 revenue from the specified sources. This is the form 
 of the first English sinking fund that of 1716. 
 
 The formally progressive sinking fund, invented 
 by Pitt and imitated by Hamilton, requires the 
 creation of a special branch of administration, say a 
 board of commissioners. To this board the treasury 
 pays the annual sinking fund appropriation, which is 
 straightway used to buy up, or redeem, government 
 stock. Practically the stock thus acquired represents 
 extinguished debt, and might properly be cancelled 
 and destroyed. But it is not so regarded. The legal 
 fiction is set up that the board is a creditor of the 
 government, and that the stocks it holds are active 
 obligations on which interest should still be paid. 
 Accordingly the treasury pays over the accruing 
 interest to the board, as it would to any large holder 
 of government securities. No matter, therefore, how 
 much debt has been amortized by the government, 
 the nominal debt and the nominal interest charge 
 remain the same. Until the last dollar is paid, and 
 the board formally surrenders the stock to the 
 treasury as defunct paper, the public debt is regarded 
 as undiminished. The treasury pays every year, or 
 every quarter, interest on stock wherever held, and 
 also a fixed sum to the board. The board receives 
 this sum together with the interest that comes to it 
 as a holder of stock. These two items, then, make 
 up the force of the sinking fund for that year, or that 
 quarter. This total is invested in more stock. The 
 next sinking fund payment is made up, not only of 
 the two former items, but also of interest on the 
 additional stock representing the previous investment. 
 
409] Sinking Funds. 99 
 
 Precisely the same results are reached in a much 
 simpler way, by the second form of progressive sink 
 ing fund. I call it "combined," because the appro 
 priation for the principal of the debt is not distin 
 guished from that for the interest, but is combined 
 with it under the head of "debt service," or under 
 the misleading title of "-sinking fund." By this 
 method a fixed sum, larger than the interest charge 
 alone, is applied annually to the debt, being divided 
 between interest and principal. If we think of this 
 sum as a line of a given length, the point of division 
 between the two uses will each year be nearer the 
 interest end than the year before. Though such a 
 sinking fund may be managed by a special board, 
 there exists no logical necessity for it as there does 
 in the preceding case. This form of amortization 
 seems to have been introduced by Gallatin in 1802. 
 
 From the combined sinking fund we easily reach that 
 form hidden-away in terminable annuities. Instead 
 of applying in lump to the debt till its extinction an 
 annual fixed payment somewhat larger than the 
 interest charge, suppose this payment subdivided, 
 and applied equally to every minute portion of the 
 debt operated on. Instead of barely paying the 
 interest on one part of the debt and buying the rest 
 outright, suppose we spread the combined fund 
 evenly over the whole mass. We have then changed 
 our terminable annual debt fund into a great many 
 terminable annuities. In operation these are identi 
 cal. A given annual appropriation will discharge a 
 debt as soon one way, as the other. Is there, then, 
 any practical difference? In fact, the practical dif 
 ference is great, and it is just the oft-recurring 
 difference between a policy under the control of gov- 
 
100 Sinking Funds. [410 
 
 ernment, and one not under its control. The ordinary 
 combined sinking fund, if established subsequent to 
 the debt it operates upon, is really a contract with no 
 one, and can be suspended at need. Even if such a 
 sinking fund is so incorporated into the loan bill, as 
 to be part of the contract with the creditors, it is 
 still under the control of government. The govern 
 ment has promised to amortize some part of the debt 
 every year, but has not engaged to take up any 
 particular bond or bonds. The contract is general 
 in its nature and may be made to include future 
 creditors. 
 
 But by throwing its annual payment into the form 
 of terminable annuities, the government enters into 
 a positive and specific engagement with the individual 
 creditor. In the annuity the instalment on the prin 
 cipal is so bound up with the payment of the regular 
 interest that a failure to pay the one is as serious as 
 a failure to pay the other, and equally with it involves 
 a confession of bankruptcy. A sinking fund in ter 
 minable annuities, then, is the most automatic and 
 cast-iron of all modes of amortization. The loss it 
 may entail was shown in the war of 1812, when the 
 government borrowed money on stock at 65 or 70, in 
 order to pay off the eight per cent, annuities into 
 which Hamilton had converted the six per cent, 
 stock. Distinct as it is, the automatic nature of the 
 annuity sinking fund has not been generally recog 
 nized. Parliament in 1822, while utterly rejecting 
 the principle of borrowing in order to pay debt, took 
 occasion to reaffirm its confidence in the wisdom of 
 terminable annuities. 
 
 Of like nature with terminable annuities, though so 
 covert that it has apparently never been recognized, 
 
411] Sinking Funds. 101 
 
 is the sinking fund concealed in the interest paid on 
 premium bonds. For, in truth, the difference is but 
 this. The terminable annuity includes, besides the 
 pure interest, a surplus sufficient in a term of years 
 to pay back all that the government has borrowed. 
 The yearly payment on the premium bond includes, 
 besides the pure interest, a surplus sufficient in a 
 term of years to pay back some part of what the gov 
 ernment has borrowed. If a $100 bond be sold for 
 $102, as it was in the loan of 1848, there are two 
 dollars that the government does not pay back when 
 the bond is due. Is this premium, then, never paid 
 back at all? Assuredly. To sell the bond at a pre 
 mium the government had to offer a rate of interest 
 higher than normal, and this narrow yearly margin 
 is the progressive sinking fund that during the term 
 of the bond gradually pays the two dollars unac 
 counted for. 
 
 Proportional Amortization. 
 
 Leaving the progressive sinking fund we pass to 
 the final type the proportional sinking fund. In 
 this type the yearly appropriation is a certain fixed 
 percentage of the outstanding debt, whatever it may 
 be. In the simple form of the proportional sinking 
 fund, this would mean diminishing or regressive 
 amortization a policy without reason and without 
 precedent. In the other form, exemplified in the 
 sinking fund of February 25, 1862, the annual pay 
 ment is increased by the interest on all bonds pur 
 chased. Hence, just as the progressive sinking fund 
 is composed of two elements the fixed annual pay 
 ment and the released interest so the proportional 
 sinking fund of 1862 has been composed of two ele- 
 
102 Sinking Funds. [412 
 
 ments the decreasing payment of one per cent, of 
 all outstanding debt, and the released interest. 
 
 In the latter, one component diminishes while the 
 other increases, and the question as to whether the 
 regress of the one will prevail over the progress of 
 the other, is decided by ascertaining the ratio of the 
 rate of proportional payment to the rate of interest 
 on the debt. This type of sinking fund, then, may 
 be either regressive, progressive, or fixed. Indeed 
 we can even imagine such a fund as, at first pro 
 gressing, and then declining when successive refund- 
 ings at lower rates of interest have checked the 
 growth of the interest component. To this class 
 belong the sinking funds of Belgium and the United 
 States. 
 
 Variations from the Type. 
 
 After this survey of the various distinct species of 
 sinking fund it remains to add that, in practice, two 
 or more species are often united. Thus the yearly 
 supply of the progressive sinking fund, besides the 
 released interest, is sometimes a n xed sum, some 
 times a certain group of revenues, sometimes both 
 together. The budgetary surplus usually goes to 
 the debt, either as a separate sinking fund, or as an 
 eventual resource of the main fund. It has been no 
 uncommon thing for a nation to have at the same time 
 a whole group of sinking funds operating each on its 
 own portion of the debt. This naturally results from 
 the policy of creating a special sinking fund with 
 each loan. Sometimes these sinking funds are of 
 different kinds and represent antagonistic financial 
 principles. Thus England, besides her five small 
 special sinking funds, has the "Old Sinking Fund," 
 
413] Sinking Funds. 103 
 
 the "New Sinking Fund," and the terminable annu 
 ities. The first marks the farthest recoil from the 
 system of inviolable payment, while the third is the 
 most rigid kind of amortization. 
 
 Tendency to uniform treatment of a public debt. 
 
 It is probable that, with certain exceptions to be 
 noted later, all specialization, either of revenue, or 
 of debt, is bound to disappear. If the treatment of 
 public debt exhibits any pronounced change, it is in 
 the direction of unity of administration. Formerly 
 the national revenues were parcelled and assigned to 
 particular uses. Now they are usually treated as an 
 indiscriminate whole. Formerly the national debt 
 existed in the form of various loans, each having its 
 own interest fund and its own sinking fund. Now 
 the debt is consolidated, based on the general credit 
 and subjected throughout to the same policy of amor 
 tization. The tendency, hence, is toward unity and 
 simplicity. 
 
 Suspension of Amortization. 
 
 A further point is to be noted in reference to in 
 violability. We have laid down the general rule 
 that a sinking fund should be suspended in a time 
 of borrowing. Indeed we can say that it should be 
 suspended as soon as the need of a future resort to 
 loans is first felt. This is not to say, however, that 
 cash for amortization is to be left to lie idle in the 
 treasury in anticipation of a remote deficit. There is 
 always some point, at which the gain by stopping 
 current interest will outweigh the ultimate loss by 
 procuring money with new bonds. 
 
104 Sinking Funds. [414 
 
 Now it is possible to suspend a regular sinking 
 fund, in whole or in part, indirectly, without the 
 formality and publicity of a legislative enactment. 
 Thus, into the act establishing Pitt s sinking fund 
 Fox introduced a clause permitting the commission 
 to use their funds in buying new stock directly of 
 the government, instead of buying on the market. 
 Part of the French sinking fund of 1833 could be 
 expended, only when five per cents were below par. 
 As this never happened, the government was able to 
 borrow this part from the sinking fund by giving 
 certificates in acknowledgment. The Walpole sink 
 ing fund was practically confiscated by being 
 charged with the interest on new loans. Gallatin s 
 sinking fund was quickly tied up, in 1812-15, by 
 being charged with the payment of short loans in 
 the form of treasury notes. By these methods, the 
 simplest sinking fund may be practically suspended 
 without direct enactment. 
 
 What is the Best Mode of Amortization ? 
 In selecting a mode of amortization, the financier 
 should ask himself whether it is desirable that the 
 debt should weigh most heavily during the early 
 years of sinking, or should bear evenly over the 
 whole period. If, as is likely, the latter is preferable, 
 then he should choose some form of the progressive 
 sinking fund. Of the four species, the specific reve 
 nue debt fund seems the most appropriate, when a 
 loan has been incurred on behalf of a productive 
 enterprise. When money has been borrowed for the 
 building of railways, or the purchase of telegraphs, 
 there seems to be a peculiar propriety in setting 
 aside the earnings for payment of interest and reim- 
 
415] Sinking Funds. 105 
 
 bursement of the principal. By this kind of lim 
 ited liability, that requires that each business that 
 comes into the hands of the government should pay 
 for itself, the people are secured against certain 
 odious forms of patronage and favoritism. But 
 apart from productive loans, the appropriation of 
 specific revenues for a debt is clumsy and antiquated. 
 
 The second species the formally progressive sink 
 ing fund has been the subject of frenetic diatribe 
 by second-rate writers for half a century. It has 
 been stigmatized as the " compound-interest sinking 
 fund," as if every species of progressive amortiza 
 tion did not involve growth at compound interest. 
 As formerly it aroused baseless hopes, so later it 
 aroused baseless fears. Of it Gibbon says : " Every 
 dollar in its keeping yields less interest than in pri 
 vate bonds . . ." In fact, the sinking fund has 
 no dollars in its keeping. He goes on : " On the 
 theory of its advocates, the first step required to give 
 it efficacy is to increase the taxation to something 
 more than the interest on the debt, and this is to be 
 carried on from year to year, and, with every other 
 addition, invested in some productive securities. It is 
 not to be presumed that any other securities than 
 those of the government would be selected for such 
 treatment, and these must be purchased at the mar 
 ket rate. The farce is too transparent to need 
 further exposure. It resolves itself into borrowing 
 money to pay borrowed money, and increasing the 
 debt by the amount of expenses incurred for the 
 transaction of the business." 1 
 
 The way in which this passage associates the 
 formally progressive sinking fund with borrowing 
 
 Gibbon, "United States Debt.", pp. 119-121. 
 
106 Sinking Funds. [416 
 
 shows a complete misapprehension of its nature. In 
 truth the Pitt-Hamilton sinking fund is simply a 
 complicated and round-about way of amortizing with 
 a constant debt charge. Though no more inviolable 
 than other sinking funds, it is more liable to confuse 
 the popular mind, partly by its want of simplicity 
 and clearness, partly by introducing the fiction that 
 government paper is productive property. Because it 
 has peculiar dangers and no peculiar merits, it has 
 been generally discarded. 
 
 Terminable annuities, as we have seen, involve 
 obligatory amortization. It would, therefore, be 
 folly to provide by means of them for the amortiza 
 tion of an entire national debt. In conclusion, then, 
 we are forced to recognize in the combined sinking 
 fund of Gallatin the best method of amortization yet 
 discovered. The example of England and other 
 nations enforces the conclusion of our theoretical 
 discussion, that finds in this American contribution 
 to practical finance the simplest, clearest, and most 
 effective mode of reducing public debts that has so 
 far been employed. 
 
I MVKIJSITY <ir CAI.IKOHNIA Llllli U!Y 
 
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 MAR 7 1918 
 
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