245 What are known 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 per cent. 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. There are two principal methods of issuing or effecting a loan. Either the state may appeal directly to capitalists and invite sub scriptions, 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. The majority of loans, therefore, are negotiated by one or more of these houses, and the name of Rothschild is familiar to every one in connexion with such transactions. By this method a borrowing state can assure itself of having the proceeds of the loan with the least pos sible delay and with the minimum of trouble. A loan may be issued at, above, or below par, though generally it is either at or below par, "par" being the normal or theoretical price of a single share in the loan, the sum which the borrowing Govern ment undertakes to pay back for each share on reimbursement, without discount or premium. Very generally, as an inducement to investors, a loan is offered at a greater or less discount, according to the credit of the borrowing Government. England, for example, may borrow at any time at par or at a mere fraction below it, Avhile a Central-American state might find difficulty in raising a small loan at 50 per cent, discount. Sometimes a state may offer a loan to the highest bidders ; for example, the city of Auckland in 1875 invited subscriptions through the Bank of New Zealand to a loan of 100,000 at 6 per cent. ; offers were made of six times the amount, but only those were accepted which were at the rate of 98 per cent, or above. The rate of interest offered generally depends on the credit of the state issuing the loan. England, for example, would have no difficulty in raising any amount at 3 per cent, or even less, while less stable states may have to pay 8 or 9 per cent. The nominal percentage is by no means, however, always an index of the cost of a loan to a state, as the history of the debt of England disastrously shows. During last century various expedients were employed, besides that of terminable annuities already referred to, to raise money for the great wars of the period, at an apparently low percentage. For example, from 3 to 5 per cent, would be offered for a loan, the actual amount of .stock per cent, allotted being sometimes 107J or even 111; so that between 1776 and 1785, for the 91,763,842 actually borrowed by the Government, 115,267,993 was to be paid back. In 1797 a loan of 1,620,000 was contracted, for every 100 of which actually sub scribed, at 3 per cent., the sum of 219 was allotted to the lender. In 1793 a 3 per cent, loan of 4^ millions was offered at the price of .72 per cent., the Government thus making itself liable for 6,250,000. Greatly owing to this reckless method the debt of Great Britain in 1815 amounted to over 900 millions. France in this respect has been quite as extravagant as England ; many of her loans during the present century have been issued at from 52 to 84 per cent., one indeed (1848) so low as 45 per cent., as a rule with 5 per cent, interest. The enormous and embarrassing increase of the French debt during the present century is doubtless greatly due to this disastrous system. Nearly every European state and most of the Central and South American states have aggravated then- debts by this method of borrowing, and got themselves into diffi culty with their creditors. Both Turkey and Egypt are notable examples, while states such as Austria and Italy have been com pelled to resort to various expedients to reduce their enormous liabilities. 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 ; but when the crisis is past and its credit revives it will be in a much more sound position with a high interest for a debt contracted at par than with a com paratively low interest on a debt much in excess of what it really received. If a state, for example, borrows at par at 6 per cent, when its credit is low, it may easily when again in a nourishing condition reduce the interest on its debt to 4 or even 3 per cent. The United States Government has actually done so with the debt It had to contract at the time of the civil war. This method of a-educing 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 per cent, to pay off a 6 per cent, debt, it may with perfect justice offer its creditors the option of payment of the principal or of holding it at a reduced interest. Government debts are, how ever, sometimes reduced after a fashion by no means so legitimate as this ; we need only refer to Turkey, where both principal and interest have been enormously reduced on a debt on which little or no interest was ever paid. Other states have been even more un principled, and have got rid of their debts at one sweep by the simple method of repudiation ; some of the States of the American Union are notorious examples of this easy method. 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 con solidated into one fund bearing a uniform interest of 3 per cent., an operation which gave origin to the familiar term "consols" ("consolidated funds"). In the early days of the English national debt, a special tax or fund was appropriated to the pay ment of the interest on each particular loan. This was the original meaning of "funds," a term which has now come to signify the national debt generally. So also the origin of the term " funded " as applied to a debt which has been recognized as at least quasi- permanent, and for the payment of the interest on which regular provision is made. Unfunded or floating debt, on the other hand, means strictly loans for which no permanent provision requires to be made, which have been obtained for temporary purposes with the intention of paying them off within a brief period. Exchequer and treasury bills are included in this category, and such other moneys in the hands of a Government as it may be required to reimburse at any moment. Where a Government is the recipient of savings banks deposits, these may be included in its floating debt, and so also may the paper-money which is issued so largely by some Governments. The unfunded debt of England is comparatively small, while in Austria and some other states it has attained formid able and embarrassing dimensions. A state with an excessive float ing debt must be regarded as in a very critical financial condition. 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 con siderable amount of exclusively internal debt, though it is obvious that the bulk of national debts are both external and internal. We referred above to various ways of reducing the burden of a debt, and also to methods of contracting loans by which within a certain period they are amortized or extinguished. Most states, however, are burdened with enormous quasi-permanent debts, the reduction or extinction of which gives ample scope for the financial skill of statesmen. A favourite method of accomplishing this is by the establishment of what is known as a sinking fund, formed by the setting aside of a certain amount of national revenue for the reduction of the principal of the debt. Unless carefully managed, a sinking fund is likely to prove a snare. Where it is the genuine result of surplus revenue, and not of money which is in reality borrowed, the only sure method of making it accomplish its pur pose is to sink it yearly in the discharge of debt. Where it is allowed to accumulate "at compound interest," as in Pitt s famous experiment, there is great danger of its being diverted from its pur pose, and the debt increased instead of diminished. In 1786 a "new sinking fund" was established in England, and certain commis sioners appointed to carry its object into effect. With certain modi fications in 1829, the fund continued in force till 1875, when another "new sinking fund" was established by which ultimately almost 29 millions were set aside for the annual service of the debt, the difference between the sum actually required and this fixed amount being applied to purchase of stock. This fund was to continue in operation for ten years. Meantime Mr Childers, chancellor of the exchequer, has had an Act passed (1883) for the creation of a large amount of terminable annuities (from five to twenty years), by the operation of which 173,000,000 of stock will be cancelled in twenty years. The existing 28 millions (over 29 millions in 1883-4) will continue to be the yearly charge of the debt, but, as the annuities into which it is proposed to convert a large portion of the debt fall in, more and more of this sum will be set free for the reduction of the principal of the debt. In the United States the large surplus of revenue over expenditure is regularly applied to the reduction of the debt, so that the enormous liabilities incurred owing to the civil war are being reduced with unprecedented rapidity. The sinking fund also plays a prominent part in the new arrangements which have been made with the creditors of Turkey and Egypt. Questions as to the policy of a state contracting debt belong Debts of properly to the general subjects of finance and political economy ; different here we shall briefly deal with actual facts, the progress of the countries, leading national debts, and their present comparative magnitudes. The debt of the United Kingdom at the Revolution in 1688 United amounted to only 664,263, with an annual charge of 39,855. Kingdom. During the reign of William III. this increased to the comparatively large sum of 12,767,000, with an annual charge of 1,215,324, which at the accession of George I. had grown to 36,000,000 and
