CHAPTER X

CONSOLS AND FUNDED DEBT

THERE are times in the history of every nation at
which it has to make a special effort. A war has
to be fought, a natural catastrophe has to be
made good, or a great revolution in the social
order has to be carried out. Special efforts of the
sort cost money. They cost so much that it would
be impossible to raise enough for them by means
of taxation while they are being made. To pay
for them money must be borrowed, and in order
to borrow it the borrowing nation must be pre-
pared with some asset to pledge to the lender as
security for what he lends. What a nation has to
pledge is its permanent taxable capacity. By
pledging that to a borrower for a loan on the spot,
it distributes the burden of the cost of its special
effort over the generations. Posterity is called
upon to help in paying for the special effort ; and
it is fair that it should be, because by the preser-
vation of the existence of the nation against its
enemies, by its reparation after a natural catas-
trophe, or by some great and permanent reform in
its social organisation, future generations benefit
no less than the present.

We have had our share of these expensive times
of special effort, and their legacy is our fixecj


national debt. Wars have been responsible for
the greater part, and especially the Napoleonic
wars and the wars in the Crimea and South Africa.
Amongst natural catastrophes that have added to
it the chief of recent times was the Irish famine
of 1848. Some 9,000,000 was borrowed then and
added to the National Debt to keep the people
of Ireland alive. Prominent amongst social re-
form for which we are still paying is the aboli-
tion of slavery in 1836. In that and the following
year 20,000,000 was borrowed and added to the
National Debt to compensate the owners of slaves,
and to rid us for all time of a stain on our civi-
lisation. In these and other ways has our fixed
National Debt been accumulated, increasing rapidly
in times of war and crisis, and slowly decreasing
as it has been paid off in times of peace. At the
present time it stands at about 590,000,000.

CONSOLS AND OTHER PERPETUAL ANNUITIES

Thanks to the good work done by statesmen
in the past in consolidating our National Debt we
need now trouble ourselves little with the various
sorts and kinds of security which have been issued
by the state through the centuries as means of
raising money. They have all been squeezed to-
gether into one big lump, the 2j per cent. Con-
solidated Debt, called Consols for short. Some-
times those who deal in them upon the Stock
Exchange call them affectionately Goschens, in
memory of the statesman who brought them into
existence instead of the old 3 per cent, stocks
by a great operation of conversion in 1888. Of
the total funded debt that lump represents about



272 NATIONAL FINANCE

97 per cent, so that in speaking of Consols we are
speaking of practically the whole of it. 1

What are Consols ? The answer to the question
is simple, but it is not as well known as it might
be. Consols, of course, are a security for money
paid, and the principal security of the British
Government ; but the exact nature of the security
is often misunderstood. It can best be defined in
the terms of the contract entered into by the
British Government with one who buys Consols.
The stock of Consols is divided into arbitrary
amounts of pounds, shillings, and pence. A penny-
worth of Consols is the smallest amount that any
one can ; buy or hold. Let us notice that these
units of pounds, shillings, and pence are simply
convenient names for the sub-divisions of the
stock. There is no necessary relation between
100 of stock and 100 in value. At the present
time (1914) I should pay only j6 for 100 of stock.
A few months ago it would have cost me 72 ; a
few years ago, as much as 112. This distinction
is expressed by calling the .100 of stock 100
nominal. Now when I buy 100 nominal of stock,
the Government makes a contract with me, and
the contract which it makes is that it will pay me
every year 2 IDS. in quarterly instalments of
1 2s. 6d. on April, July, October, and January 5th.
It reserves to itself the right to cancel the con-
tract by paying me 100, if it chooses, but not
before 1923. What needs attention here is that the

1 A small part, about ^30,000,000, of the total of 2J- per cent.
Consols dates from Gladstone's Conversion in 1853 and Childer's
Conversion in 1884. It has been repayable at the option of the
Government at par since 1905 ; otherwise it is similar in its inci-
dents to Goschens.



CONSOLS AND FUNDED DEBT 273

Government does not contract absolutely to repay
the debt represented by the 100 nominal of stock
at any given time. It may do so after April 5th,
1923, if it likes ; but only if it does like, and we
may be sure that if in 1923 the market value of
;ioo nominal of stock is less than the price of
.100 at which it will then have the right to repay
it, it will not like, for the simple reason that it
would be cheaper for it to buy the stock at the
market price than to repay it at ^100.

All that my purchase of 100 nominal of stock
gives me is a right to 2 los. a year. It gives me
no right to the repayment of 100 or of the money
which I spent on the stock. What I have bought
is, in fact, nothing other than a perpetual annuity
of 2 ios., subject to the Government's right to
redeem it in the manner stated. Such is the nature
of Consols. Other Governments, whose credit is
less good than ours, have often to borrow on other
terms. To encourage lenders they have when
they borrow by the issue of stock to promise to
repay the stock at its nominal value at a certain
time. Not so the British Government. When it
borrows money, it promises only to pay interest on
it, and the possibility of redemption is reserved to
it as a right, but not as a liability. It is this circum-
stance that is responsible for the variability of the
market value ofioo nominal of Consols. Securities
that must be repaid at a fixed price on a given day
will gradually rise in price as the day of repay-
ment draws near to the price at which they will be
repaid, as long as investors have confidence in the
promise of repayment. Lacking such a fixed price
towards which to rise, the price of 100 nominal

T



274 NATIONAL FINANCE

of Consols varies with the varying rate of interest
in the market for loans. The price of it is the
price of a promise by the Government to pay to
the holder 2 los. a year, nothing more and nothing
less. Now, when the supply of capital for invest-
ment is increasing in proportion to the demand
for it, and borrowers are well supplied with funds
to borrow, the rate of interest which they are
willing to pay for loans falls : and when the supply
is diminishing in proportion to the demand, and
borrowers are ill supplied, that rate of interest
rises. It follows that when the supply of capital
for investment is increasing in proportion to the
demand, the amount of it which must be given for
a promise to pay a fixed amount of interest in-
creases also. The price of Consols is the amount
of capital to be given for a promise to pay a fixed
rate of interest, so that price will rise and fall as
the amount of capital for investment rises and
falls, and as the market rate of interest for loans
falls and rises. One other circumstance only could
interfere to upset the working of this rule, and
that would be were investors to fear that the
Government might not be able or willing to keep
its promise to pay their fixed annual interest
to holders of Consols. But as the credit of
the British Government is the best in the world,
that circumstance affects the price of Consols
less at any rate than it affects the price
of any other security; and so their price, better
than that of any other security, measures the
changes in the value of capital in the investment
market.

When the Government wants to borrow money



CONSOLS AND FUNDED DEBT 275

and to add the amount of the loan to the funded
debt of the country, it makes a fresh issue of
Consols. A resolution authorising the Treasury
to make the issue is introduced to the House of
Commons in the Committee of Ways and Means.
When the loan is required to meet the excess of
expenditure on Supply Services over revenue for
the year, the form of the resolution is that "any
money required for raising the supply granted to
his Majesty for the service of the year may be

raised up to an amount not exceeding by

means of an issue " of Consolidated 2j per cent,
stock, it may be, or of whatever other security the
government decides to issue. Statutory authority
is given to the resolution by the next Consolidated
Fund Act or Appropriation Act, or by a special
act. But without waiting for the final Act of the
legislature, which takes time to get passed, the
Treasury has authority to issue the stock as soon
as the resolution has been passed in Committee.
It is well that it should be so, because to have an
issue of the sort hanging over its head upsets the
whole financial community, and other would-be
borrowers in particular. Besides, knowing that
the issue had to come, some might be interested
by operations on the Stock Exchange to raise the
price of Consols, and so to make the issue more
expensive to the Government. It is essential how-
ever that statutory authority for the issue should
be obtained before the first payment of interest
is made upon the new stock. To create the stock
the simple process is that the Treasury issues a
warrant for its creation to the Bank of England,
and the Bank brings it into being by an entry on



2;6 NATIONAL FINANCE

its registers. In consultation with the Bank and
its advisers on the Stock Exchange the Treasury
fixes the price at which the issue is to be made.
It fixes, that is, the price at which it will sell 100
nominal of the stock, carrying the right to receive
2 los. a year. The price is fixed by reference to
the market price of Consols at the time. It is
probably arranged that it shall be a trifle less than
that market price, so as to make the offer look
tempting to investors. A prospectus is issued
announcing the offer to the public and inviting
subscriptions. Lists of applicants are made out at
the Bank of England; and if, as is generally the
case, more is asked for than is offered, the amount
offered is allotted amongst the subscribers in pro-
portion to the amount which they asked for. When
they have paid to the Bank the instalments of the
purchase price the transaction is over ; the national
debt has had another permanent increase, and a
fresh burden has been laid upon the shoulders of
tax-paying posterity. All sums received in respect
of an issue of Government stock are credited to the
Exchequer Account, and out of that account they
are drawn, as Exchequer issues, under statutory
authority, to be spent upon the purposes for which
they were raised.

Interest on the fixed debt is a standing annual
charge on the Consolidated Fund. The money for
it is issued under the authority of the permanent
Acts of Parliament which authorised the raising of
the loans in respect of which it is paid, and it forms
the chief part of the Consolidated Fund Services.
We have already seen how issues for Consolidated
Fund Services are made. It remains only to draw



CONSOLS AND FUNDED DEBT 277

attention to the difference in the manner of pay-
ment of interest on the funded debt from that of
the payment for other Consolidated Fund Services.
The chief difference is that payments for interest
are made, not by the Paymaster General, but by
the Bank of England It is the Bank which keeps
the registers of stock which show who hold it, and
to how much interest each holder is entitled.
Every quarter the Treasury sends to the Bank an
authority to pay interest to the holders, which the
Bank subsequently transmits to the Comptroller
and Auditor General. An issue of funds enough
to pay the interest is made to the Bank out of the
Exchequer Account by the Treasury. The Bank
credits the amount to a special Dividend Account
which it keeps for the purpose, and draws upon
that to pay the stockholders. With the funded
debt at its present figure the amount disbursed
every quarter for dividends amounts to about
;3>75o,ooo. In between whiles a balance of about
100,000 is kept on the Dividend Account. There
are always a certain number of holders of Consols
so indifferent to lucre that they leave their dividends
unclaimed. Every year the Bank pays over to the
National Debt Commissioners sums which have
stood upon its books as unclaimed dividends for
ten years, and the Commissioners buy stock with
it and put it to a separate account. There is about
1,250,000 of stock at the present time on this
account representing unclaimed dividends, to which
is added about 1,000,000 of unclaimed stock, dere-
lict goods of which somebody is the fortunate
but ignorant owner. Unclaimed stock and divi-
dends can be recovered from the National Debt



278 NATIONAL FINANCE

Commissioners, through the Treasury, by anybody
who can make good his title.

Of the balance of 3 per cent, of the total funded
debt which is not 2\ per cent. Consols, a small
amount of about 3,800,000 consists of 2f per cent.
Consols, the remains in its original form of an old
issue of stock which has survived the processes of
consolidation and conversion which reduced the
interest on Consols in general to 2^ per cent.
Except for the difference in interest, the 2} per
cent, stock resembles in its character and incidents
the 2^ per cent. The Government has already the
right to redeem it; and has had it since 1905. But
since it would have to redeem it at par, and it can
buy it in the market for much less, the right is of
not much practical interest. On the Stock Exchange
they call the 2| per cents. " Childers," after the
minister who made them.

Finally the last constituent of the funded debt
is the Government's permanent debt of 11,015,000
to the Bank of England (and a corresponding debt
of 2,631,000 to the Bank of Ireland). This has
been gradually accumulated as the result of a
number of loans by the Bank to the Government
at various times. On it the Government pays
interest, and since the conversion of Consols to a
2-J per cent, basis that has been the rate of interest
paid. It has a special feature of interest, that it
serves as part of the security on which the Bank's
issue of paper currency is based. Those who argue
that the bank should keep a bigger reserve of gold
with which to secure its notes sometimes suggest
that a good way of enabling the Bank to get more
gold would be for the Government to pay off its



CONSOLS AND FUNDED DEBT 279

debt, and then the Bank could buy gold with the
money. When that suggestion comes to the front
the Government's debt to the Bank becomes in-
teresting ; but we must not allow that to draw us
aside into questions of banking and currency,
which do not concern us.



CONTINGENT LIABILITIES

Goschens, Childers, the debts to the Bank,
Terminable Annuities, and the unfunded debt, for
all these the British Government is directly liable.
For interest and principal thereon the sole security
is the Government's promise to pay. All this,
moreover, is " dead-weight " debt, an expressive
phrase which means that the state gets no return
in cash out of the objects for which it was incurred.

In addition thereto there are some big debts for
which the Government has a liability which is con-
tingent only ; it promises to pay them if somebody
else does not. For the most part the Government
does get some return in cash out of the objects for
which these debts were incurred, and so they are
not " dead-weight " debt. There is a large number
of contingent or guaranteed loans of the sort.
With most of them we need not trouble ourselves,
because they are exceptional affairs which do not
form part of the regular structure of our finances.
Such are the loans to Greece, Turkey, and Egypt,
which we have guaranteed at one time or another
for political reasons, in order to help those per-
manently impecunious countries to raise the much-
needed wind. But there are two big guaranteed
loans raised for our own social purposes which do



280 NATIONAL FINANCE

form part of the regular structure of our finances,
and to those we must give some attention. They
are the Local Loans, and Irish Land Stock. When
we mention that the sum of them now amounts to
over ; 1 60,000,000 it will be seen that they are no
small matter.



LOCAL LOANS

Let us deal first with the older institution, Local
Loans. Local authorities have of course their own
revenues from the rates ; but at times they need in
addition capital in lump sums in order to discharge
their duties under many Acts of Parliament, of
which the chief are the Education, the Poor Law,
the Public Health, and Small Holdings Acts.
They need it to spend, for example, on sewers, on
the purchase of land for small holdings, and on
other public purposes which are constantly in-
creasing in number and in cost. It would be
inconvenient that all these little public borrowers
should be running about competing for money in
the public loan market; they would have to pay
high rates of interest, and they would be making
bad bargains and getting into difficulties. So,
when, imposing upon them duties which make it
necessary for them to have capital, Parliament has
undertaken at the same time to provide them with
the capital which they need. It does not provide
it out of the annual revenue ; the burden would be
too heavy. It borrows the money and then re-lends
it to the local authorities. For this purpose a
capital fund has been established, called the Local
Loans Fund. Money is raised for it by the issue



CONSOLS AND FUNDED DEBT 281

to investors of stock called Local Loans Stock.
This bears interest at 3 per cent, and it has
been redeemable at par, if the Government should
please, since 1912. Since its market value is much
below par, that is a barren right. As the require-
ments of local authorities have increased fresh
stock has been issued from time to time, and the
total amount now outstanding is over 70,000,000.
Sometimes the stock has been issued publicly and
sold to investors at large in return for their
savings ; sometimes it has been handed over
privately to the National Debt Commissioners as
an investment for the big sums which they are
always receiving for investment from the Post
Office and other public departments. The primary
security for the stock is the assets of the Local
Loans Fund; we shall see what those assets are.
In addition the Government guarantees the interest
on the stock should the primary security prove
inadequate. It does not guarantee the principal
of it.

The Local Loans Fund is an account to the
credit of which is set in the first place the money
received from investors for Local Loans Stock as
it is issued from time to time. 1 It is managed by
the National Debt Commissioners. Out of it is
drawn the money advanced as loans to the local
authorities to meet their needs for capital. Interest

1 In 1888, in accordance with the provision of the Local Loans
Act of 1887 by which the fund was founded as a preliminary to the
Goschen conversion scheme, a first issue of 36*5 millions of stock
was created and issued to the National Debt Commissioners as
security for Local Loans in lieu of other forms of security therefor
then outstanding. The total has been raised to the present figure
by subsequent issues of stock.



282 NATIONAL FINANCE

is received in return ; and the interest received from
the local authorities on the loans made to them, and
the repayments which they have to make as instal-
ments of the capital of those loans, are paid into the
fund. A separate account is kept of payments on
account of interest and on account of capital. Out
of the fund the Commissioners draw the 3 per cent,
interest which has to be paid to the holders of
Local Loans Stock, and money with which to pay
for the expenses of the management of the Fund.

Commonly interest received from the local
authorities is greater than interest paid to holders
of Local Loans Stock with expenses thrown in ; so
that the Fund is run at a profit. Annual profit is
set to a Surplus Income Account, which is used to
make good any loss of capital owing to the issue of
Local Loans Stock at a discount. Instalments
repaid annually by local authorities in respect of
the principal of the loans made to them are enough
to provide the greater part of the capital needed to
make fresh loans with. If there were no fresh loans
to make they would be used to redeem Local
Loans Stock, or they could be invested in other
securities and so accumulated for the purpose of
redeeming Local Loans Stock some day. But as a
matter of fact there are always fresh loans to
make, and by using for those loans the instalments
of capital repaid the amount of fresh Local Loans
Stock which has to be issued to investors is kept
down. Keeping down the amount of such stock
which has to be issued afresh is as useful work for
the instalments as redeeming the outstanding
stock. The effect is the same.