between the methods equal to what Dr. Price states; but it is the profusion, and not the mode of application, that is the cause of that difference. They may be applied to the construction of canals, harbors, and other objects of national utility; and the benefits accruing from these to the public, may repay the expense of their execution, or otherwise; but the propriety of this mode of application of surplus revenue, does not belong to our present inquiry.

In war, let us adopt Dr. Price's supposition of three millions being required annually in addition to the sums raised within the year, and of continuing the application of £200,000 as a sinking fund; which sum is comprehended in the loan of three millions. The debt contracted in three years, is nine millions; and the additional taxes for payment of interest at 5 per cent come to £450,000. The national debt redeemed by a sinking fund of £200,000, operating by compound interest in three years, is £630,500, and therefore the additional unredeemed debt is £8,369,500.

If no sinking fund be continued during the war, a loan of £2,800,000 only will be required the first year, the interest of which is £140,000. But the taxes imposed that year amount to £150,000 (for we suppose the extent of taxation in both methods equal), therefore there is a surplus of £10,000 applicable to the service of the second year. The loan required for the second year will therefore be £2,790,000; the two loans together, £5,590,000; and the interest upon them, £279,500. The additional taxes imposed the two first years amount to £300,000, leaving a surplus of £20,500 applicable to the service of the third year. The loan required the third, is therefore £2,779,500, and the amount of the three loans £8,369,500, exactly the same as the unredeemed debt when a sinking fund is continued; and it is obvious that the same equality will hold for any number of years.

When Dr. Price says that a debt of 258 millions might be discharged in eighty-six years, at no greater expense than an annual saving of £200,000, he overlooks the taxes imposed, year after year, for the payment of interest; a great part of which would not have been needed, if that annual sum had not been separated from the public revenue. The reasoning used

above is equally applicable to any other supposition of war expenditure, whatever be the annual deficiency, whether uniform or varying, whether continued for three or thirty, or an hundred years, still the taxation and expenditure of each year being the same, the finances of the nation will be found in the same condition at the end of the period, whether the sinking fund be preserved inviolate, or entirely laid aside.

If no sinking fund be kept up for thirty years, a little alteration on the arrangement of public accounts would bring them exactly to the same state as if it had been uniformly adhered to; and conversely, the present form of our financial accounts, arising from a sinking fund, may be brought by a like alteration of arrangement, to the form in which they would have stood, if no sinking fund had ever been thought of. It is impossible that a mere change of order in the public accounts, capable of being reversed at any time, can be attended with advantage to the public.

At the termination of a war, the nation remains charged with a certain debt, and it possesses or ought to possess, a certain surplus revenue. The efficacy of this surplus to discharge the debt depends upon its proportion to the debt, and the length of time during which it is applied to that purpose, and upon these alone. It operates by compound interest. But the manner in which the debt was contracted, or the surplus obtained, have no relation to the progress and period of its discharge. It is of no avail that a sinking fund had been operating by compound interest during a former peace. When war breaks out again, the operation of compound interest is at an end. In place of continuing to discharge debt, an additional debt is contracted. When peace returns, the operation of discharge recommences from a new basis, according to the state of finance at the time. The public debt is certainly increased - the proportion of surplus revenue to that debt, and therefore the time requisite for its complete discharge, may be greater or less than at the former peace; but the two periods of peace cannot be united to obtain a powerful effect from the long continuance of compound interest.

The Doctor's plan for discharging the national debt by borrowing money at simple interest, in order to improve it at com

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and

pound interest, is, we apprehend, completely delusive. admits the absurdity of such a measure in private life, its absurdity in national finance is exactly the same. The cases differ only in extent of sum, and duration of time, which no ways alter the general tendency of the measure. Suppose a million borrowed for this purpose, and assigned to commissioners for the redemption of the national debt, in whose hands it operates by compound interest. The interest of this loan is £50,000, which must either be provided for by some additional tax, or saved by some measure of public economy; or if neither of these be adopted, an additional loan must be made next year to pay the interest. In the former case, it is the tax or the economy, and not the operation described, that benefits the revenue; and they would have produced the same effect by affording an additional surplus improved at compound interest, without any loan. In the latter case, an additional sum of £50,000 is borrowed the second year; and a sum equal to the interest of both loans, or £102,500, the third year; and thus the debt accumulates by compound interest against the public, exactly to the same extent that the money vested in the hands of the commissioners accumulates in its favor.1

82. Sinking-Fund Legislation in the United States. The early sinking-fund acts of 1792 and 1795 were constructed, in general, upon the British model. They placed certain revenues in the hands of commissioners who were to redeem United States stock, and then draw from the treasury the interest on the purchased stock and apply it to making further purchases. The act of 1802, passed in accordance with recommendations of Gallatin, enlarged and simplified the sinking fund, but did not disturb the provisions of Hamilton's sinking-fund law of 1795.

1 A further point is brought out by Hamilton in his criticism of Pitt's sinking-fund policy, which was shaped according to the theories of Dr. Price. Hamilton shows that the money borrowed in war time in order to keep up payment on the principal of the old debt was secured on terms which really imposed a heavier rate of interest than the old debt bore. The result was that England lost heavily by borrowing at a higher rate in order to redeem a debt that bore a lower rate. He estimated the loss occasioned in this manner between 1793 and 1812 at something less than £20,000,000. Inquiry, pp. 149–160. — ED.

In 1817, however, the whole complicated apparatus of previous acts was swept away, and a permanent appropriation of $10,000,000 was made for the payment of interest and reduction of principal of the debt. Moreover, it was distinctly pro. vided that, in case war should occur with any foreign power, the United States should be free to discontinue the redemption of the principal of all debts not included in the provisions of earlier sinking-fund laws.

The following account of the operation of the sinking-fund law of 1862 is presented by Professor E. A. Ross, in his monograph upon Sinking Funds: 1

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 principles. 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 Feb. 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 States. 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

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 In Publications of the American Economic Association, Vol. VII (1892). Reprinted with consent of the author and the Association.

Notwithstanding the law of 1862, there was no compliance with its sinking-fund provision during the war. At the close Secretary McCulloch, who resembled Gallatin as Chase resembled Hamilton, ignored the law of 1862 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 administration 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 recommended that such extra purchases be added to the sinking fund until it equaled what it would have been, if the law had been complied with from the first.

In the great funding act of July 14, 1870, reorganizing the public debt, it was provided that all bonds applied to the sinking fund be recorded, canceled, 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.

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 Secretary 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 practically construed to suit the emergency. It was announced that for 1874-75 there would be a surplus revenue of nine millions to be applied to the sinking fund. As under the 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.