DEVELOPMENT

There is a great difference, from the economic
point of view, between spending borrowed money
on productive and on unproductive purposes.
Three millions spent upon a battleship breeds no
fresh wealth ; its only effect is to withdraw money,
materials, and men from productive employment,
and so to impoverish the country. Incidentally it
may enrich the country by saving it the expenses of
an invasion, but that is politics and not economics.
To borrow money to spend on unproductive
purposes must always be an economic evil. But
it may be a part of the highest wisdom in govern-
ment to make some capital expenditure in order
permanently to increase the wealth of the nation
by increasing its productive capacity. It may be
as wise and necessary for a Government to do that
as it is for a private business to raise fresh capital
in order to increase its output and turnover, by
building new factories, buying new patents or new
machinery, and so on. Prudent expenditure of
capital on such purposes is a positive good; its
expenditure for unproductive purposes is a positive
evil, although often a necessary one. It is melan-
choly, then, to find how little of our National Debt
represents productive expenditure, and how much
unproductive. Money borrowed on Local Loans
and Irish Land Stock may be deemed to be spent
on productive purposes. Practically the whole of
the debt represented by Consols has been raised for
unproductive expenditure on wars and armaments.
It is only within the last few years that any
special arrangement has been made in our financial
organisation for the regular provision of funds by
the State for the maintenance and development of
the resources of the country and of its productive
capacity. Even now the arrangements are rudi-
mentary. In 1909 there was established a Develop-
ment Fund under the control of the Treasury. It
is to be made up of " monies to be provided from
time to time by Parliament"; no actual sum is
fixed by way of annual grant or otherwise. So far
its principal receipt has been 1,500,000 out of the
Old Sinking Fund for 1910-11, in lieu of certain
annual grants for which provision was made at
first. A semi-judicial body, called the Development
Commission, considers applications from Govern-
ment departments, local authorities, universities,
and schools, or from any association or company
not trading for profit, for money for such productive
purposes as the promotion of agriculture, afforesta-
tion and reclamation of land, rural transport,
harbours, inland navigation, fisheries, and "any
other purpose calculated to promote the economic
development of the United Kingdom." Money
may be provided as a grant or as a loan ; it is the
Treasury that provides it out of the fund, on the
recommendation of the Commissioners. Loans
repaid and any profit made out of the money



296 NATIONAL FINANCE

provided from the fund are to be paid back into
the fund. The assets of the fund (now about
2,750,000) are invested until they are wanted;
they may be invested in any Trustee security, and
in practice it seems that they are invested for the
most part in Treasury Bills so as to be the more
readily available. There is a similar but separate
fund and Board for the business of Road Improve-
ment, which get their income from certain special
taxes.

Up till now the Development Commission has
done a very small business. In 1913 they dis-
tributed about 140,000 only, all in grants, of which
the Boards of Agriculture and Fisheries got the
lion's share. So much space indeed need not have
been given to this little piece of machinery did it
not serve to point a moral. Eighty millions a
year is what we spend on the Navy and Army,
unproductive objects. A hundred and forty thou-
sand a year is what we spend in developing the
country's resources through the Development
Commission. What, we may wonder, would be
thought of the finances of a firm which spent
80,000 a year on insurance against fire and
burglary, and 140 a year on the development of
its business?

Development Fund and Commission are still in
their infancy ; sooner or later, if the work is to be
carried on, it will have to be settled how money is
to be provided for them. At present the law that
it is to be " provided from time to time by Parlia-
ment " leaves all vague. In particular it leaves it
vague whether the expenditure of the Commission
is to be capital expenditure, provided by borrowing,




CONSOLS AND FUNDED DEBT 297

or expenditure out of revenue. In fact, the
principal contribution to the fund so far has come
from the Old Sinking Fund, which is a fund, as we
shall see, for the reduction of debt, and so it has
come in reality out of capital. But originally it was
intended to provide the money out of revenue; so
the matter is in doubt. Since the money of the
fund is to be used for those purposes only which
are "calculated to promote economic development,"
it would be financially sound that it should be pro-
vided by means of loans.

An optimist may hope that the Development
Fund is the small beginning of great things ; and
that in course of time it may become the instru-
ment of some of the most important and beneficial
activities of the state. If the nation is ever in a
position to stop spending too much of its money on
unproductive things, if it is ever able to turn the
hosepipe of public money on to water the fields
instead of sprinkling the sea, here are the begin-
nings of an organisation to direct the fertilising
stream aright. When the millennium comes, there
will be no Admiralty and no War Office ; their
buildings and their grants will pass to an enormous
Development Commission. As a practical ideal
that may be absurd; but a hundred years hence
there may also seem some absurdity in the present
state of affairs.

It may be that with the Development Fund lies
the future of productive capital expenditure by the
nation. So far the nation's chief expenditure of
the sort has been by way of Local Loans and Irish
Land grants. Perhaps some day the function of
the Development Fund and its Commissioners



298 NATIONAL FINANCE

as the central machinery for productive capital
expenditure will be recognised by unifying these
three branches of administration. To gather the
whole business of productive capital expenditure in
a single fund and under a single authority would
serve a very useful purpose. It would show the
nation how much it was spending profitably in
enriching the country, as distinguished from the
sums spent unproductively in increase of the dead-
weight debt.

THE NATIONAL DEBT COMMISSION AND SOME OTHERS

We have had a good deal to say already about
the work of the National Debt Commissioners in
connection with Local Loans and Irish Land Stock,
and we shall have a good deal more to say about it
in connection with the Sinking Funds. It will be
convenient here to describe the general nature of
their functions, which are in practice discharged
by the Comptroller of the National Debt Office
and his staff, at their office in Old Jewry. Their
chief function is to receive whatever money any
Government departments may have for investment,
and to invest it for them. A catalogue of the funds
with which they deal in this way will show the
great variety of the work which they do. They
receive and apply the Old and New Sinking Funds
(to be dealt with hereafter), they sell and pay life
annuities, they control the Local Loans and Irish
Land Purchase Funds, they receive and invest the
funds of the Post Office and Trustee Savings banks,
of the Friendly Societies, of Irish National School
teachers, and last, but not least, of the National



CONSOLS AND FUNDED DEBT 299

Insurance Commission. These are some of their
chief occupations ; they have many minor ones.
At the Bank of England the accounts of the Com-
missioners number more than forty; they hold
over 200,000,000 in Government stocks, principally
in Consols, Local Loans, and Irish Land stock ; so
theirs is no small business. Amongst their numerous
occupations, the chief in financial importance is
their dealing with the funds of the Post Office
Savings Bank and of the National Insurance Com-
mission. Because of the big sums involved, they
deserve a more particular description.

Big sums are paid every year by the lower
and middle classes into the Post Office Savings
Bank at local post offices. The Post Office keeps
their money for the depositors, and pays them a
little interest on it two and a half per cent. Until
they want to draw it out, the Post Office has to do
something with the money, as any banker would
have to do. It hands it over to the National
Debt Commissioners for investment. The National
Debt Commissioners keep the accounts of the
funds oi the Post Office Savings Bank. Out of the
deposits, as they are paid in, a balance of about
1,000,000 is kept in the hands of the Postmaster-
General, at local post offices, and so on. From
that are paid sums withdrawn from time to time by
depositors. In a normal year the order of the sum
paid in and paid out is about 50,000,000. Normally
more is paid in than out, and the total balance
held has slowly grown. In prosperous times it
grows at the rate of about 2,000,000 to 3,000,000
a year. The excess of deposits over withdrawals
is handed over from time to time by the Post Office



300 NATIONAL FINANCE

to the National Debt Commissioners for invest-
ment. Thus they now hold between one and three
quarters and two hundred millions of stock on
account of the Savings Bank Fund, representing
the accumulations of deposits. They are allowed to
invest the funds in any stock charged upon the
Consolidated Fund, or guaranteed by Parliament.
In fact their chief investments are in Consols,
Local Loans and Irish Land stock, Exchequer
Bonds, and certain special terminable annuities.
If so be that the withdrawals exceed deposits, the
Commissioners of course have to sell stocks and
pay over the proceeds to the Post Office ; but that
is rare; the normal state of affairs is a steady
growth of deposits, and a steady buying of invest-
ments on behalf of the Fund. Interest received
on the investments goes to paying interest to the
depositors and the expenses of administration, and
to making good the depreciation in the capital
value of the investments. Any deficiency in these
charges left over after using up all the interest
received is to be made good by a grant of Parlia-
ment out of the Consolidated Fund. Conversely,
any excess is to be paid into the Exchequer. The
Consolidated Fund is thus liable to make good any
amount by which the funds held may prove to be
insufficient to meet the claims of depositors in re-
spect of their capital ; in other words, the Govern-
ment guarantees the capital of their deposits.

We have here a constant flow of money through
the hands of National Debt Commissioners into
the stock markets for the purchase of Consols and
other government stocks. There are one or two
other Government departments which have funds



CONSOLS AND FUNDED DEBT 301

to invest from time to time, and invest them in
Government stocks. They have not nearly so
much as the National Debt Commissioners, who
hold for their various Funds about 70 per cent, of
all the Government stock held by public depart-
ments ; but they have a considerable amount.
Chief amongst them are the Official Trustees of
Charitable Funds, the Supreme Court of Judicature,
and the India Office for its Gold Standard and
Paper Currency Reserves. They hold the bulk of
the balance of 30 per cent. Together they make
one of the most important groups of customers
which buy Government stocks in regular and large
amounts ; and their proceedings have no little
effect on the market therein upon the Stock
Exchange.

There is another great stream of money flowing
now through the hands of the National Debt Com-
missioners. It is part of the stream that is always
flowing into and out of the National Insurance Fund.
Section 54 of the National Insurance Act of 1911
establishes a Fund, the National Health Insurance
Fund, into which all contributions received from
the insured and their employers and all moneys
granted by Parliament are to be paid. The sums
concerned are enormous. Between July, 1912,
when the Act came into operation, and the end of
May, 1913, the date for which the first account was
published, the amount received into the Fund for
England alone was 15,772,000, and the balance
held on May 3ist, 1913, was 10,430,000. It is pro-
vided by the Act that sums available for permanent
investment are to be paid over to the National
Debt Commissioners for that purpose ; and any



302 NATIONAL FINANCE

sums in the Fund not required to meet current
liabilities are to be dealt with in the same manner.
An annual return of the investments so made is
rendered by the National Debt Commissioners to
Parliament. From the first return of the sort we
learn that on December 3ist, 1913, the Commis-
sioners held on account of the Funds for England,
Wales, Scotland, and Ireland, investments to the
nominal amount of nearly ^"19,000,000. Owing to
the uncertainties which still prevail as to the calls
likely to be made upon the Fund, a large part of
this, about 6,000,000, is held in Treasury Bills and
Exchequer Bonds. The remainder is held in
Consols, Local Loans Stock, and Irish Land
Stocks.

The National Debt Commissioners thus act as
a conduit pipe through which money is constantly
running out of the pockets of depositors in Savings
Banks and others, and into those of dealers in
Consols and Government stock. There is an
aspect of this business of theirs which deserves
consideration. Money in the hands of the Govern-
ment, as we shall see more clearly in a later
chapter, is money that is lying idle. The more the
Government has, the less there is to use in trade
and commerce. For the sake of trade, it is good that
the Government's balances should be as small as
possible, and the way for the Government to keep
them as small as possible is for the departments to
make their disbursements as soon as they can after
they have got money to make them with, and to
invest as promptly as they can any funds on deposit
and any other money for which they have no
immediate use. For the latter purpose well-oiled



CONSOLS AND FUNDED DEBT 303

machinery for investment at the National Debt
Office is all-important. Were it not to work
quickly and smoothly, releasing promptly through
the stock markets the enormous and continually in-
creasing sums received on deposit for the Savings
Banks and Insurance Commission and other bodies,
the Government's balances would tend to be per-
manently increased, to the detriment of trade.

There is a very useful and practical provision
which has been added at times to various acts
of Parliament authorising investment of public
funds through the National Debt Commissioners,
which helps to keep down balances by prompt
investment. It is a provision to enable them to
make use of balances of public funds in their hands
for investment as temporary advances for certain
purposes without waiting for formalities. It has
already been mentioned that the Commissioners
are empowered to make advances to the Treasury,
out of the balances of public funds in their hands
for investment, as Ways and Means Advances
under the Appropriation Act, in the same manner
as the Bank of England. Similarly, the Commis-
sioners are empowered to make temporary ad-
vances out of the funds of the Post Office Savings
Bank or the National Insurance Funds to such
borrowers as the Local Loans Fund or the Irish
Land Purchase Fund. The advance is made by a
mere cross entry in the books at the National Debt
Office. If it is not repaid, it has subsequently to
be regularised by an issue of stock, such as Local
Loans Stock or Guaranteed Land Stock, as security
for the advance. The power enables the Com-
missioners to invest public funds without waiting



304 NATIONAL FINANCE

for the formalities of a stock issue : often the
effect of it is that when stock is issued it is merely
handed over to the Commissioners as security for
an advance already made.

With the National Debt Commissioners' opera-
tions on account of the Sinking Funds we will deal
in the next chapter.

ASSETS

Debt suggests its converse, assets; and we
should not end our consideration of the gloomy
liability side of our national balance sheet without
a glance at its brighter side also. It will not delay
us long. There is not much there to set against
our total gross liabilities, funded, unfunded, and
contingent, of over 700,000,000 ; but there is some-
thing. We have a speculative investment in Suez
Canal shares which we bought from Ismail in
1875 ; various colonies owe us a million or two for
help that we have given to them in the matter of
electric cables ; we hold some debenture stock
of the Cunard Co. as security for money which we
have lent to it with which to build ships. These
and another small asset to be dealt with below,
make up some ^"40,000,000. So that were the
nation to suspend payment and its business to be
sold at break-up prices, its creditors would get a
dividend of about is. \\d. in the pound.

Many small states in the Balkans or in Scandi-
navia could produce a balance sheet which would
look better than that of the British Government.
They have Crown lands, forests, and mines of
value to set down on the assets side of the sheet,




CONSOLS AND FUNDED DEBT 305

balancing their debts. Nevertheless their credit is
not better than ours, and that shows that what
a lender thinks about in lending to a state is not
what assets it has in hand, but the capacity of its
people to pay taxes. It is because the taxable
capacity of the United Kingdom is vastly bigger
than that of Bulgaria that the British Government
can borrow at 3 per cent, in comparison with
Bulgaria's 7 per cent., although in proportion to its
total debt Bulgaria's state assets are much bigger
than ours.

That other small asset referred to above is one
that occupies more space in the accounts of the
Exchequer than its importance deserves. It is a
little advance which is at most times outstanding
from the Exchequer Account as a loan ; but since it
is a loan to a government department, it is really
only a cross entry in the government's accounts.
The loan is made to the Mint. Gold and silver
bullion is coined there into money, to supply the
needs of the United Kingdom and of many of the
Colonies. In coining gold the Mint acts as agent
only for other parties, who bring their gold to it to
be coined. It does not buy gold, and is not itself
the owner of the gold which it is coining. But
with silver it is different; that is bought by the
Mint and coined by it, acting as a principal and on
its own account. Since silver bullion enough to
make twenty shillings can be bought for less than
a pound, the Mint makes a comfortable profit on
the transaction. It depends on the market price of
the bullion, but in an ordinary year nowadays the
profit is round about 150 per cent. From year to
year the amount of silver coinage which the country

needs varies a good deal, and so does the amount
of silver bullion which the Mint has to buy. Trade
affects it most ; when trade is active and the people
are well off, more silver coin is needed for wages
and for retail payments across the counter. In an
ordinary year the Mint may manufacture and sell
to the banks to put into circulation silver coin
equivalent to some 1,500,000, bullion for which
would cost it about 600,000. It must get that
600,000 from somewhere. It does get it from the
Treasury, which, under the Coinage Act of 1870,
advances money to it from time to time out of the
Exchequer Account with which to buy the bullion.
Advances are made in amounts of about 150,000,
and the Mint repays them when it has sold its
silver coin to the banks and received payment
therefor. It pays interest to the Treasury at
3 per cent on its average debt in respect of the
advances. In the weekly returns of the Exchequer
Account these little advances and repayments can
be seen constantly going and coming, and dis-
turbing in a small degree the comparative record
of revenue and expenditure from week to week.
At the end of the year the amount of the advances
outstanding is an asset of the Exchequer, because
the Mint is liable to repay it in due course.

Assets and liabilities make up the nation's
capital account. We have now considered how its
debt comes into existence, and what it is ; and we
go on to consider how it is paid off.