Sinking fund

“ Practice varies as to the proper handling of the income and expense of the sinking fund. Sometimes they are treated as affecting—i.e., increasing or decreasing—only the sinking fund reserve and as having no place in the current profit and loss. ”

“ The question of the sinking fund has greatly occupied the attention of financial men, and upon few schemes have so many and such various opinions been given. To view the subject by the light of common sense, it seems palpably absurd that more money than was necessary should be borrowed for the sake of paying it again, or that, while a surplus fund remained in the Exchequer, new loans should be raised. ”

“ A sinking-fund is an expression generally applied to any sum of money reserved out of expenditure to pay debt, or meet any contingency. Now, observe that our remarks are not directed against it in this simple form. A surplus of revenue obtained by moderate taxation, saved through frugal expenditure, and applied to the reduction of the national debt, [pg 53] is always a good thing. But the sinking-fund to which we chiefly refer was a system of borrowing money to pay debt. It might be said that the identical money which was borrowed was not the same which was used for paying the debt ”

“ It establishes a sinking-fund for the payment of debts when they mature, but does not pay the debts. The original contracts of loan are not changed. They remain as they were before, and are only to be met at maturity. All that has been done is to make it the duty of the company to lay by a portion of its current net income to meet its debts when they do fall due. In this way the current stockholders are prevented to some extent from depleting the treasury for their own benefit, at the expense of those who are to come after them. ”

“ The exposure was conclusive, and no one since that time has ventured to support a sinking-fund.
As already stated, it is a very good thing to save something out of the revenue and pay off part of the debt. But no good is done by keeping it to accumulate at interest, because the debt it would pay off is just accumulating against it. Apply this to private transactions. You are in debt L.110. You have L.10, and the question is: Are you to pay it at once, and reduce your debt to L.100, or are you to keep it accumulating at interest? ”

“ Pitt’s supreme authority it can hardly be conceived that any one really believed a sinking fund to be effective so long as the government’s expenditure exceeded its income; it was, however, 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. ”

“ Unlike a reserve, a sinking fund has no effect on the apparent profits of the period in which it is created. It does, however, tie up or render unavailable for dividends a certain part of those profits. [238] Whether or not it is carried on the books in a separate account, a sinking fund is a part of the surplus of a business. ”

“ The secret of making money scarce will lead doubtless to the discovery of making it plenty; and then the public debt, being of no use to anybody, will naturally stand aside, as poor relations in times of plenty. Besides, gentlemen being selected, not for their own interests, but for the public good, will, it is to be expected, donate their salaries to a sinking fund, which will carry it off, as some companies do their stockholders’ dividends, to unfathomed bottoms. In fact, if the debt could be cut up into dividends, nothing more would be heard of it. ”

“ A sinking fund is a convenient means frequently resorted to for redemption of a debenture debt, and is especially suitable where the security is of a wasting character, leaseholds, mining property or a patent. Such a fund is formed by the company setting apart a certain sum each year out of the profits of the company after payment of interest on the debentures. ”

“ It is in allusion to this that we have spoken of the sinking-fund as a great hoax. We cannot sanction the morality of governments acting on conscious fallacies; and in this instance the natural confidence in the funds rather enlarged than decreased when the fallacy was exposed and the system abandoned.
Keeping in view Dr Price's views of the potentiality of compound interest, we now give a brief account of a [pg 54] singular attempt made in France to put them in practice, and by their omnipotence pay our national debt and that of other nations too, out of a small private fortune. ”

“ It was to be beyond the control of Government, and this fund with its accumulations was to be applied, as circumstances permitted, to the reduction of the debt. The principle is obviously sound as far as it goes, that is to say, what a nation saves it can clearly apply to the purpose of reducing its liabilities, but there the matter ends; there is and can be no peculiar and mysterious power in a sinking fund. ”

“ In 1727, the interest of the greater part of the public debts was still further reduced to four per cent; and in 1753 and 1757, to three and a half and three per cent; which reductions still further augmented the sinking fund.
A sinking fund, though instituted for the payment of old, facilitates very much the contracting of new debts. It is a subsidiary fund always at hand to be mortgaged in aid of any other doubtful fund upon which money is proposed to be raised in an exigency of the state. ”

“ The law in existence when the corporation was created, and still in force, requires the creation of a sinking-fund by the company to meet its bonds, and under it large sums have been accumulated for that purpose, and still further sums must be raised. ”

“ If we examine carefully the many criticisms that have been levelled against Pitt’s Sinking Fund, they apply only to his handling of the fund during the Great War with France. Every sciolist in finance can now see the folly of borrowing money at a high rate of interest in order to provide the fund with its quarterly supply.259 It is clearly a case of feeding a dog on his own tail. But such a proceeding, though lauded by Price, was quite contrary to Pitt’s original intention, which was the thoroughly sound one of paying off debt by a steady application of the annual surplus. ”

“ If the sinking fund reserve is charged against current profit and loss instead of surplus, the showing of net profits is thus corrected but there has been no real reservation of profits, the sinking fund reserve being in reality a valuation account for the depreciating asset, and thus the letter of the trust agreement is violated. ”

“ The more the public debts may have been accumulated, the more necessary it may have become to study to reduce them, the more dangerous, the more ruinous it may be to misapply any part of the sinking fund; the less likely is the public debt to be reduced to any considerable degree, the more likely, the more certainly is the sinking fund to be misapplied towards defraying all the extraordinary expenses which occur in time of peace. ”

“ A sinking fund is at bottom only a means of converting into annuities a perpetual rent with the sole difference that in the case of a loan by annuities the interest is supposed constant, while the interest of funds acquired by the sinking fund is variable. If it were the same in both cases, the annuity corresponding to the funds acquired would be formed by these funds and from this annuity the State contributes annually to the sinking fund. ”

“ For, as the interest on the national debt has been at several times reduced, (by the consent of the proprietors, who had their option either to lower their interest or be paid their principal) the savings from the appropriated revenues must needs be extremely large. This sinking fund is the last resort of the nation; on which alone depend all the hopes we can entertain of ever discharging or moderating our incumbrances. And therefore the prudent application of the large sums, now arising from this fund, is a point of the utmost importance, and well worthy the serious attention of parliament ”

“ Money set aside by a municipality or corporation to sink a debt at a certain future time is called a sinking fund. For instance, if a city should issue twenty-year bonds for $100,000 to secure money for street improvements the entire debt would fall due in twenty years, but to avoid having such a large amount fall due in one year, a proportional sum is set aside each year as a sinking fund—that is, to sink, or reduce, or wipe out the indebtedness when the bonds mature. Bonds are not paid in advance of maturity. ”

“ His remark is not directed against loans, but against the funding or accumulation of them, which most of us, in the present generation, are quite ready to admit to be all evil. The remedy to which he pointed, was the establishment of a sinking-fund to prevent debt from accumulating; but so long as Mr Cobden's economical views are acted on, and the currency maintained on its present basis, the idea of a sinking-fund is altogether visionary. The evil which Adam Smith complains of is permanent funding, not loan. ”

“ And were this nation once to adopt the system of raising money, in time of peace, sufficient to defray the charges of government, the sinking fund would prove a resource for the future, far above any thing that France can boast of. ”

“ In the foregoing statements of expenditures, actual and estimated, no amount is allowed for the sinking fund provided for by the act approved February 25, 1862, which requires that 1 per cent of the entire debt of the United States shall be purchased or paid within each fiscal year, to be set apart as a sinking fund. ”

“ A very great portion of their permanent burdens arises from the interest of a debt which the government most unwisely suffered to accumulate almost a century, without one serious effort or systematic plan for its reduction. Her present minister, at the commencement of his administration in 1783, established a permanent sinking fund, which now produces very great effects ”

“ This sinking fund, which provides for the extinction of the debt in thirty years, compares most favourably with that usually provided by local bodies for works of so permanent a character. The Local Government Board frequently allows loans to be created with a sinking fund extending over much longer periods. ”

“ The rapidity of the operation of a sinking fund is easily calculated, but not so easily credited, particularly by people not inclined to do so, and who would not themselves have the constancy and self-denial to leave it time to operate. Besides, by this operation, we shall not get free of debt till the taxes are raised far above their present amount. Our enemies may be pardoned for believing it impracticable, particularly as many of our friends are of the same opinion. ”

“ He never dreams that he ought to lay by a sinking fund because the decrease in purchasing power of money is reducing the real value of his principal. Again, the stockholder and enterpriser generally are beguiled by a vain reliance on the stability of the rate of interest, and so they overinvest. ”

“ With respect to the Finance plan, I feel convinced that it must end where it ought to have begun, in an appropriation of part of the Sinking Fund, and that this will be done with more or less disguise and humbug, but that no regard for consistency will be sufficient to prevent a measure so essentially necessary. ”

“ From the statement of the Auditor it also appears that under the sinking-fund act the net earnings at the disposal of the company for the last fiscal year would have amounted to $4,016,383.04, and that this sum would have enabled the company to pay interest on all its bonds, land-grant, sinking-fund, and bridge bonds, and dividends on par value of its capital stock of very nearly 6 per cent. ”

“ Frequently a sinking fund is invested in securities, such as government bonds, which are placed in the hands of a trustee, thus insuring against the withdrawal of the funds from actual use in the business. ”

“ English three per cents. and French fours are firm in the market; but England and France have not the same immeasurable [Pg 109] resources that are ours, nor is either so secure in its government. It is easy to see that our debt could have been funded without paying more than four per cent., but for the doubt cast upon our credit by the dishonest schemes of Repudiation. “Payment in Greenbacks” and “Taxation of Bonds” are costly cries. Without these there would have been $40,000,000 annually to swell our surplus revenue. But this sum, if invested in a sinking fund at four per cent. ”

“ If they produce more, it is generally something which was neither intended nor expected, and is, therefore, seldom very considerable. Sinking funds have generally arisen, not so much from any surplus of the taxes which was over and above what was necessary for paying the interest or annuity originally charged upon them, as from a subsequent reduction of that interest ”