§ MR. HUBBARDsaid, that on rising to call the attention of the House to the impolicy of raising money by Loans payable in Terminable Annuities, he would begin by thanking the right hon. Gentleman the Home Secretary for his courtesy in answer- 288 ing the question arising out of this subject which he had put to him the other evening. He would now endeavour, as briefly as possible, to bring before the House the circumstances connected with the usual means by which public loans were raised for the service of this country. And first as to Consolidated Annuities. In 1855 a loan was made upon the sale of no less than £16,000,000 in Consols. The price of that loan was valued by the then Chancellor of the Exchequer at 88, and that right hon. Gentleman thought the contractor would be fairly entitled to a difference of 2 per cent for his profit and to cover his risk. He entirely agreed with that basis of calculation, and starting from that point they there had an instance in which a loan of about 14½ millions sterling was raised by the sale of 16 millions of Consols at a difference of only 2 per cent on the market price of that stock. The Consols so created enabled the country to obtain money at a rate of interests of £3 8s. per cent. The next case of a considerable loan in Consols occurred in February, 1856, when a loan of £5,000,000 was contracted at the price of 90. The saving of interest on delayed payments reduced the price to the contractor to £89 13s. 8d., and the market price of the day was 91. The interest on that loan paid by the country was £3 6s. 8d. On the 19th of May in the same year there was another loan of £5,000,000 in Consols at 93. The absolute gain to the contractor over the price of the day was £1 13s. 3d., and the interest at which the country borrowed this money was £3 4s. There were thus three instances in which over £25,000,000 had been raised in Consols at an average deviation from the market price of the day of less than 2 per cent, and at a rate of interest to the nation of about £3 7s. 6d. He submitted that that was an exceedingly moderate rate of interest; and no one would suppose that there was any other stock through which at the present moment an equal sum could be borrowed at so small a charge to the country.
It might be said that if they resorted to Consols they would make a permanent addition to the national debt. That, however, depended upon whether they ever paid those Consols off again; that was to say, whether they applied their surplus revenue to the redemption of a portion of the debt. Now, between the 5th of April, 1845, and the 5th of April, 1846, no less than £4,600,000 was used in the redemption of the national debt, and 289 within the year following £2,700,000 was used for the same purpose. These were rather large sums to be employed in that manner; but the House was aware of the very admirable machinery through which these operations were effected. The amount of the quarter's surplus revenue being ascertained, the Government broker received instructions under which an equal portion of the national debt was paid off; and it was remarkable that these redemptions had a very small influence on the price of stock, as might be seen by looking at the variations in Consols from quarter to quarter. It would be found that concurrently with the purchases for the Government there was sometimes even a decline in price; so that whatever may have been the cause of the decline, it was obvious that these purchases had not even the effect of sustaining the market in the face of unfavourable circumstances. He passed over the two or three years of the Irish famine as unsuitable for illustration, and came to 1849–50, when £4,000,000—and to 1850–51, when also £4,000,000—were redeemed from the stocks forming the national debt. During those two years the variations in the price of stock were not at all noticeable, the price at one time being 95, at another 97, and another 96. Therefore, as in the creation of Consols, they submitted to a disadvantage in the first instance of something less than 2 per cent, so in redeeming the same debt they paid nothing more than its market price, and the Government made no sacrifice in the operation. The merits of Consols as a means of raising money were, that they could borrow in them at a low rate of interest, and incur a very small charge through what was called the turn of the market between the buying and selling. Now, allowing 2 per cent to be lost in the first instance by the turn of the market, and assuming 2 per cent more to be ultimately lost before they replaced the Consols through the medium of the National Debt Commissioners, that would give 4 per cent, which, spread over a period of thirty years, would be equal to ¼per cent added, to the interest. Taking, therefore, the average interest through a period of years at £3 7s. 6d., and adding ¼ per cent as the disadvantage by buying and soiling, they would have £3 12s. 6d. as the entire cost to the country of raising money by means of Consols.
It was notorious that Exchequer bills could not be thrown in large quantities 290 on the market at any one time without diminishing the value of the large amount already there, and therefore he assumed that Exchequer bills were not suitable for the purpose, although the low rate of interest which they bore—only 2 J per cent—made them a remarkably cheap medium of raising money. With regard to Exchequer bonds, he regretted that apparently the feeling of the country, or, at all events, the feeling of the House, was unfavourable to the continuance of that form of security, and he had even heard the Chancellor of the Exchequer reproached for not having prepared to pay off the £1,000,000 of Exchequer Bonds which remained of those which were put in circulation some years ago. Having been in a position to know the idea which the right hon. Gentleman attached to them at the period of their first issue, it was his conviction that those bonds were created in order to become a convenient and permanent mode of representing a portion of the national debt, by increasing the attraction of public securities for a large number of investers, and so serving the public interest. He thought that Exchequer bonds only required to be in larger numbers to obtain a permanent standing and an easy market circulation, and that if a larger number had been issued, or were issued now, it would have that effect. As an individual he should deem exchequer bonds to be a perfectly legitimate and convenient mode of raising any large sums which, by hypothesis, the country might hereafter have to raise.
Leaving those securities, he came to a class of which the use was very questionable—namely, terminable annuities. The annuity to which the noble Lord the First Lord of the Treasury alluded the other day, and which was called the dead weight, was for £585,745. That annuity was taken by the tank in 1823, at a time when the Funds were exceedingly disturbed—in fact, so disturbed that he confessed he had been unable to do more than make an approximation of the value when comparing the rate at which it was taken and the rate then receivable on Consols. But, seeing that the rate of interest which was derived from the investment at that period was £4 2s. 1d., he assumed that the annuity yielded a return somewhat more advantageous than would have been derived from an investment in Consols at the same period of the year. With regard to this annuity, he wished to mention a circumstance 291 in proof of the inconvenience of using terminable annuities as a means of investment. When the security was first acquired by the Bank it yielded, as he had said, £4 2s. 1d. per cent. In 1842 an income tax was for the first time imposed, and it was imposed through the medium of an old Act of Parliament full of the most grievous defects, one of which was that it indiscriminately taxed capital and interest. The effect of the imposition of the income tax on the dead-weight annuity in the hands of the Bank was that instead of receiving £4 2s. 1d., which they had done up to 1842, they were obliged to recast the whole schedule of their affairs, and to rate the annuity as producing only £3 18s. 2d. In April, 1847, a further change, and an aggravated change, in the income tax, forced the Bank again to recast the value of their property, and to rate the annuity at £3 15s. 6d. In 1854, from a similar cause, they were obliged to reduce it to £3 9s. 1d., and in 1855 they were again obliged to reduce to £3 1s. 9d. Then he was happy to say the grievance was slightly relieved, and the annuity acquired a more promising aspect. But when the House observed that the value of that security was reduced from £4 2s. 1d. per cent to £3 1s. 9d. per cent through the confiscation of capital, they would see how grievous was the income tax, and how utterly impossible it was for capitalists to look with favour upon a security which was subject to an operation such as he had described.
The next annuity to which he had to draw the attention of the House was one which in the year 1834 was created and left in the hands of the Bank of England. The history of it was very remarkable. In that year the Bank of England had to receive from the Government one-fourth of their capital which they had lent to the Government. The sum was £4,080,000, and they in the first instance agreed that it should be paid in Reduced Three per Cents at 90. From some cause, the origin of which he could not trace, instead of receiving those Reduced Three per Cents the Bank received ultimately an annuity of twenty-six years, that annuity being calculated at the same rate of interest as the Three per Cent Annuities would have returned. An annuity of £212,783 l2s. was inscribed as representing the repayment of the debt to the Bank. Not only was the interest of that annuity seriously affected as he had described by the imposition of the income tax, but during the 292 last six years and-a-half of its existence, a sum of not less than £60,000 was confiscated from the capital of the Bank, that was to say, a sum of £60,000 was never paid at all, having been confiscated through the medium of the income tax.
The next annuity to which he should call attention was what was known by the name of the Long Annuities, and the Long Annuities were created at various times from 1780 to 1860, and in 1860 they all expired. He had no means of tracing the precise terms upon which they were created, but when the income tax was enforced, the investors being frightened, they were subjected to a diminution in price considerably exceeding the immediate pressure of the tax itself. The investors protected themselves not only against the tax of which they knew, but against the tax which they apprehended and knew was just possible.
He next arrived at the last instance more recently before the House—the annuity which was incorporated with the £16,000,000 of Consols as the consideration for the loan of £16,000,000 made in 1855. He here again referred with acknowledgment to the right hon. Gentleman the Secretary for the Home Department, whose answer he had already noticed, but he was obliged to state some particulars at variance with the right hon. Gentleman's calculations. He entirely agreed in the estimate of the deduction which the contractor might fairly take for his risk and profit, and he found even that the estimate was corroborated by the state of the price current in the month following. The loan was contracted on the 20th of April, 1855, and on the 20th of May, 1855, while Consols were precisely at the same price, 90 ¼, the annuity was quoted at 2 per cent premium. The fact might be taken as established, and if so, they had these data to go upon. The value of Consols on the 20th of April, 1855, the day the loan was made, was 90. The allowance for the contractor's risk and profit was 2 per cent. That left 88 as the value of Consols, under the arrangement for the loan, but the money was not given by the contractors immediately. They had the indulgence of deferred payments through the whole of the remainder of the year, some instalments becoming due as late as December, and the allowance of interest which the Government made, through these deferred payments, amounted to £1 2s. That 293 being deducted from £100 left £98 18s., and the value of Consols being £88 the actual price given for the annuity was £10 18s. He was obliged to state that these figures led to a result widely at variance with the result which the Secretary for the Home Department gave to them. All that the right hon. Gentleman stated on his own knowledge and his own estimate was perfectly accurate, but the computation, which he supposed was prepared for him at the Treasury, was excessively erroneous, for the right hon. Gentleman informed the House that the annuities yielded an interest of only £3 15s. per cent, whereas the real interest which those annuities yielded, or in other words the rate of interest paid by the Government in the thirty years annuities, was no less than £5 4s. 2d. per cent. That was the last instance of the sale of annuities by the Government, and he put it to the House whether that was at all a satisfactory operation, or one which they would desire to see renewed? Why was the bargain so bad? Not merely because the form of an annuity was adopted, but because people were afraid of the income tax, which was then leviable, and of which they apprehended the continuance, notwithstanding the pledge of the Government that it should cease in 1859. One thing, however, was perfectly clear that the Government then sold these annuities at an extraragantly bad rate for the finances of the country. The right hon. Gentleman had referred to the latest price of the annuities as affording a better test of the excellence of the bargain than the price at which they were originally taken, but the present price had really nothing to do with the question. The managers of the Patriotic Fund had invested largely in the purchase of annuities, because they ran over a period of years covering the ages of the pensioners, and Government institutions did not suffer from the pressure of the income tax. The great bulk of the holders of the same stock held only very small portions, and were anxious chiefly for obtaining a certain amount of income during their lives from a safe investment. The price now quoted in the Stock lists was the price at which the dealer would supply the very slender demand which now and then occurred for very small amounts, and afforded no clue to the price at which the Government could place any important quantity. He had thus endeavoured to bring before the House the main features of the question which appear- 294 ed to him to be interesting at this moment—namely, the funds which, on the hypothesis of a necessary loan, it would be most advantageous for the country to adopt. He must remark, however, that the argument that terminable annuities presented an advantageous mode of raising money, because they formed a limited engagement, was a pure delusion. The circumstance that specific liabilities must be discharged at a certain period did not prevent the creation of fresh liabilities in another shape. In discharging its covenanted obligations, the country might be compelled to have recourse to some other means of raising money. The experience of the period he had been reviewing illustrated this state of things forcibly, because, although £10,000,000 of their liabilities in the shape of terminable annuities had expired and £10,000,000 more had been redeemed by the Commissioners for the Reduction of the National Debt—in all, £20,000,000—they had borrowed £30,000,000. Thus theywere£10,000,000 in debt more than they were before. In fact, it was impossible to bind the House or the country to discharge their debts positively unless there was a surplus for the purpose. It should be borne in mind, too, that in changing our liabilities from one form to another, there was always a certain waste of means. Another argument had been used in favour of terminable annuities, which was not very complimentary to the House of Commons. It was said that, unless bound down by obligations, such as terminable annuities constituted, the House of Commons would never agree to levy the taxes which were required to discharge the debt. He protested against any attempt to deceive the country through false terms as unwise in itself and unworthy of the Government. He denied that it could ever be desirable to call a portion of the capital debt interest in order to cajole the country into redeeming so much of it. To sum up the disadvantages of this mode of raising money, it appeared to him that it confounded things which were in their nature entirely distinct—capital and interest, wasted the resources of the country and cast a stigma on the intelligence and patriotism of the House. On these grounds he expressed the strongest disapprobation of that mode of obtaining funds. There was another and a simpler method, which was far preferable, and which experience and. necessity had forced on every large 295 capitalist since the income tax was invented, and that was to make a loan payable by periodical instalments over a series of years, each payment being divided into capital and interest. The great vice of the terminable annuity system was its complexity. If they wanted to make a loan on the most advantageous terms, they should simplify the transaction as much as possible.
SIB BROOK BRYDGESsaid, he would beg leave to ask the Chancellor of the Exchequer when he intended to bring on the question of the Excise duty on hops?
§ THE CHANCELLOR OF THE EXCHEQUERThat is a question to which a great deal of interest is, no doubt, attached, but, considering that it has once been fully discussed during the present year, it can scarcely be regarded as having an urgent claim on the attention of the House. Consequently it must take its chance till other more urgent questions are disposed of. As to the question of terminable Annuities, we have heard from my hon. Friend (Mr. Hubbard) on that subject a lucid and able statement, as all his statements are. I do not wish to appear disrespectful to him in allowing it to pass in silence; and yet I fear I may appear so, in making but a single comment upon it. I cannot help expressing my great regret at the occasion which he has taken for making his interesting speech. My hon. Friend has made a speech bearing on the financial part of the proposition of my noble Friend at the head of the Government for providing for the erection of fortifications. I think it would have been more advantageous for the common purpose we have in view had my hon. Friend brought forward this question on a special occasion, instead of introducing it on the Motion for adjournment, when there are few hon. Members present, and when it is mixed up with a number of miscellaneous subjects. I shall certainly not attempt to follow my hon. Friend in the details of his statement. I must say, however, I think he has understated the effect to the public of borrowing on Consols, if you are to include in the estimate of the cost of the operation the full charge which is incurred by the public before the debt is repaid, because he has made an allowance of only ^ per Gent to cover the profit of the contractor, and the average difference of the rate at which the public borrow and at which they pay. In my opinion that average difference is enormously understated by 296 my hon. Friend. My hon. Friend has overlooked the whole argument which is advanced by those who advocate the borrowing of money by terminable annuities—namely, the spontaneous action of the repayment of the loan. That is not a matter for discussion at present; but it is one which we shall have ample opportunities of discussing. My hon. Friend has not dealt with that portion of the case. I am sure that the House is obliged to him for the light which he has thrown upon the subject; but we should have been still more obliged to him, and he would have contributed still more to assist us in our discussions, if he had availed himself of the regular and legitimate opportunity, and treated the subject when the proposition of my noble Friend is before the House.
§ MR. CAYLEYWhen will that opportunity occur?
§ THE CHANCELLOR OF THE EXCHEQUEROn every stage of the Resolution of my noble Friend, and of the Bill which will be founded upon it.