John S. Keltie, Hugh Chisholm, William Blain and Edward W. Hamilton

“ There are two principal methods of issuing or effecting a loan. Either the state may appeal directly to capitalists and invite subscriptions, or it may delegate the negotiation to one or more bankers. The former method has been occasionally followed in France and Russia, but in practice it has been found to be attended with so many disadvantages to the borrowing state or city that the best financial authorities consider it unsound. The great banking-houses have such a command over the money-market that it is difficult to keep even a direct loan out of their hands. ”

“ In short, the only economically sound method of meeting expenses which the ordinary resources of a state cannot meet is by borrowing in the open market on the most advantageous terms obtainable. On this normal method of borrowing, loans are divided into different categories, though there are really only two main classes, which may be designated perpetual and terminable. Borrowing in quasi-perpetuity has hitherto been the mode adopted by most states in the creation of the bulk of their debt. ”

“ To enable the right of compulsory redemption to be enforced, it is only necessary that the government should have command of sufficient funds for the purpose of paying off the stockholders, or should be able to raise those funds by borrowing at a rate of interest lower than that borne by the stock. Any circumstances which might tend to raise the price of the stock above par would also assist the government in raising its redemption money on more favourable terms. ”

“ What are known as lottery loans are greatly favoured on the continent, either as an independent means of raising money, or as an adjunct to any of the methods referred to above. These must not be confounded with the lottery pure and simple, in which the contributors run the risk of losing the whole of their investment. The lottery loan has been found to work well for small sums, when the interest is but little below what it would have been in an ordinary loan, and when the percentage thus set aside to form prizes of varying amounts forms but a small fraction of the whole interest payable. ”

“ National debt is so universal that it has been described as the first stage of a nation towards civilization. A nation, so far as its finances are concerned, may be regarded as a corporate body or even as an individual. ”

“ When the amount of stock to be dealt with is large, the raising by a fresh loan of the amount required for redemption would occasion great disturbance. A more convenient method is the conversion of the existing stock to a lower rate of interest by agreement with the stockholders, whose reluctance to accept a reduction of income is overborne by their knowledge that the power of redemption exists and will be put in force if necessary. The opportunity for conversion may be looked for when the price of a redeemable stock stands steadily at or barely above par. ”

“ When a state has a variety of loans at varying rates of interest, it may consolidate them into a single debt at a uniform interest. For example, in 1751 several descriptions of English debt were consolidated into one fund bearing a uniform interest of 3%, an operation which gave origin to the familiar term “consols” (“consolidated annuities”) . In the early days of the English national debt, a special tax or fund was appropriated to the payment of the interest on each particular loan. ”

“ The system of life annuities was sometimes combined in England with that of perpetual annuities, or interest on the permanent debt—the life annuity forming a sort of additional inducement to lenders of limited means to invest their money. At one time the form of life annuities known as tontine was much in vogue both in England and France, the principle of the tontine being that the proceeds of the total amount invested by the contributors should be divided among the survivors, the last survivor receiving the whole interest or annuity. ”

“ What are known in England as exchequer bills and treasury bills may be regarded as loans payable at a fixed period of short duration, from three months upwards, and bearing very insignificant interest, even so low as 1/2%. They are a useful means of raising money for immediate wants and for local loans, and form handy investments for capitalists who are reserving their funds for a special purpose. Exchequer bonds are simply a special form of the funded debt, to be paid off generally within a certain period of years. ”

“ If a state, for example, borrows at par at 6% when its credit is low, it may easily when again in a flourishing condition reduce the interest on its debt to 4 or even 3%. The United States government actually did so with the debt it had to contract at the time of the Civil War. ”

“ All modern states, it may be said, have been compelled to have recourse to loans, either to meet war expenses, to carry out great public undertakings or to make up the recurrent deficits of a mismanaged revenue. Resources obtained in this way are what constitute national debt proper. ”

“ British National Debt Conversions.—The great bulk of the funded debt of the United Kingdom consists of annuities, which are described as perpetual, because the state is under no obligation to pay off at any time the capital debt which they represent. All that the public creditor can claim is to receive payment of the instalments of annuity as they fall due. On the other hand, the government has the right to redeem the annuities ultimately by payment of the capital debt ”

“ A state, for example, may be regarded as imperishable, and its debt as a permanent institution which it is not bound to liquidate at any definite period, the interest, unless specially stipulated, being thus of the nature of transferable permanent annuities. While an individual who borrows engages to pay interest to the lender personally, and to reimburse the entire debt by a certain date, a state may have an entirely different set of creditors every six months, and may make no stipulation whatever with regard to the principal. ”

“ The German empire, apart from the individual states which comprise it, had in 1882 a debt of about £24,000,000, while its invested funds amounted to £37,390,000, including a war-treasure of £6,000,000. The majority of economists disapprove of such an accumulation of funds by a state as a bad financial policy, maintaining that the remission of a proportionate amount of taxation would be much more for the real good of the nation. At the same time the possession of a moderate war-fund, it must be admitted, could not but give a state a great advantage in the case of a sudden war. ”

“ Nearly every European state and most of the Central and South American states have at one time or another aggravated their debts by this method of borrowing, and got themselves into difficulty with their creditors. Financiers almost unanimously maintain that in the long run it is much better for a state to borrow at high interest at or near par, than at an apparently low interest much below par. A state of even the highest rank may find itself in the midst of a crisis that will for a time shake its credit ”

“ National debt, again, is divided into external and internal, according as the loans have been raised within or without the country—some states, generally the smaller ones, having a considerable amount of exclusively internal debt, though it is obvious that the bulk of national debts are both external and internal. ”

“ This method of reducing the burden. of a debt is evidently no injustice to the creditors of a government, when used in a legitimate way. A state is at liberty at any time to pay off its debts, and, if it can borrow at 3% to pay off a 6% debt, it may with perfect justice offer its creditors the option of payment of the principal or of holding it at a reduced interest. ”

“ In these circumstances, to propose the conversion of the 5% stocks to 41/2% would probably have been futile, unless the new stock were guaranteed for a long period, as holders would have stood in fear of a speedy further reduction. Nor could the government hope to succeed in a reduction to 4%. Mr Vansittart’s plan was to offer £105 of stock bearing 4% in exchange for £100 of 5% stock, thus adding slightly to;the capital of the debt, but effecting a large annual saving in interest. ”

“ Loans, again, contracted on the terminable principle are of various classes; the chief of these are (1) life annuities, (2) terminable annuities, (3) loans repayable by instalments at certain intervals, (4) loans repayable entirely at a fixed date. ”