THE

Sinking-Fund.

GEORGE M. BROWNE.

BOSTON:

ROBERTS BROTHERS.THE

Sinking-Fund.

BY

GEORGE M. BROWNE.

BOSTON:

ROBERTS BROTHERS.
1874.,;,i 'i (© i '£> 6

fet \ t ^

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Camb?'idge:

Press of John Wilson and Son.THE SINKING-FUND.

S When Sir Robert Walpole, a century and a half ago,1^
established a sinking-fund, he did it with the con-
currence of both houses of parliament, and in the full
confidence in the merits of the scheme, and in the
hope that, within a reasonable period, susceptible of
accurate computation, the national debt of Great
Britain would thereby be paid and extinguished.
When, some twenty years later, having been in
the mean while charged with perverting the fund to
corrupt uses, he took the accumulated treasure and
applied it towards defraying the ordinary charges of
government, he did it with equal assurance that he
was administering the finances of the country to the
best advantage.

A half century afterwards, Pitt revived the scheme
amidst the enthusiastic applause, not of his own party
V* only, but of the opposition, led by Fox himself,

* Pitt’s sinking-fund survived, with various fortune,

| sometimes accumulating, sometimes trenched upon,
as the needs of the exchequer and the vicissitudes of
the kingdom made expedient, throughout the wars
® of the French Revolution and of the Empire ; and it
| was not until the year of grace 1829 that parliamen-
| tary enactments on the subject were finally brought
u to a close.4

Reflecting men had long previously been led to
suspect that there must be some fallacy at the bottom
of a scheme, which looked so plausible in its state-
ment, so promising for the absolute extinction of the
national debt, but during the existence of which,
the hatiopal dehf had in fact increased three or four
hundred-fold, — in gre$t part, indeed, from the require-
ments of war, but in part also from the exigencies
of the country in time of peace.

But it was a Scotchman, Professor Hamilton, of
Aberdeen, who finally pricked the bubble, exposed its
utter hollowness, and laid bare to the minds of those
islanders that it was an ignis fatuus they had been
following. He demonstrated to them, so clearly that
there was no gainsaying it, that it was a delusion to sup-
pose there was any mysterious self-generating or self-
increasing power in a sinking-fund, accumulating
by compound interest or otherwise, by which the
1 payment or extinguishment of public or corporate
/ debt could be made easier than by the primitive, com-
j monplace, however disagreeable, method of actual
1 direct counting out of the coin or its equivalent.

The South Sea bubble and Law’s Mississippi scheme
each had likewise in view, or at least held out the
alluring hope of, the extinguishment of public debt
by financial legerdemain. Those schemes both sud-
denly collapsed, with disaster and confusion; and the
'sinking-fund delusion in England, if it lived much
longer and at length died an easier and a lingering
/ death, came also to as complete and effectual an end;

1/ But the idea of a sinking-fund still retains its hold
in the American mind. The great State of New York,5

as it leads in population and wealth, furnishes also
the example of a sinking-fund Jby means of which its
debts are certainly to be paid, without trouble, with-
out taxation, at least without being felt by the tax- f
payers, so easy is to be the process of depletion on I
the one hand, and so rapid that of accumulation on
the other. True, the fund has shared, in times past,
the fate, and, should exigencies sufficiently pressing
occur, may again share the fate which has sometimes
befallen other sinking-funds, which not unfrequently
befel the British sinking-fund, of being used, instead
of borrowing, for the ordinary or extraordinary dis-
bursements of the treasury. But all deficiencies
have now been made up,, whether by taxation in part
or chiefly by loans does not fully appear. But the
New York fund is again entire.

J Massachusetts also has its sinking-fund, invested-''7
partly in its own securities, and more largely in the
obligations of the cities and towns of the Common-
wealth; thereby giving much official encouragement
to those municipalities to indulge in the luxury of
running into debt. Other States, and a great number;
of corporations, municipal and private, have their
sinking-funds, which are relied upon for the pay-
ment of bonded debt. So deep-seated is the delusion,. ,*
on this subject, that (corporations) wishing to borrow f "
money sometimes obtain more than they want, in
order to set apart a portion of the borrowed sum as
a sinking-fund for the ultimate redemption of the
whole ; under the marvellous hallucination, which the
lender also generally participates in, that the more
they owe up to' a certain point, the more able they6

will be to meet their obligations. The absurdity of
this paradox is not more transparent than that of the
still more frequently exhibited species of financial
charlatanry of hiring annual sums in order to keep
up an already existing sinking-fund.

.p/ /"It may be stated as a general proposition, which
/ hardly admits of qualification, that a debtor, whether
| a state, or a corporation, private or municipal, never
/ gains any thing, never derives any advantage whatever
‘ • from the creation or the continuance of



/

a

a sinking-

ifund. On the contrary, he is worse off by reason of
its existence, to the extent at least of the cost of its
management, and also to the extent of the risk of
loss by depreciation and mismanagement. There is
but one road to the payment of debts, public or
private, and that is by raising revenue enough above
ordinary expenditures; earning money enough above
\ expenses to pay therm Whether the money thus
Vaised or earned is applied directly to the extinguish-
ment of liabilities, or is deposited as a sinking-fund
to accumulate until the liabilities mature, may not
seem at first view so material. In either event, the
debtor must raise the money, and the whole of the
money, by earnings or by taxes first or last, by which
payment is actually made. By no device, by no jug-
glery, can he evade that stern necessity. If the debtor
borrows money to establish or keep up a sinking-
jfuna, or, what amounts to the same thing, if he
| borrows money for his ordinary expenditures in order
I thereby to have a surplus to put into his sinking-fund,

he is simply increasing his liabilities, and complicating
his accounts to no good purpose. If, moreover, as ,

-S'	>7

often happens, especially in the financial business of
the larger cities, the borrowing is at seven per cent
or upwards, while the accumulation goes on at five or
six, the absolute loss becomes very material.

/Whenever the money is worth more to the debtor,^
or, in case of public debt, to the tax-payer, for use in
business or for ordinary purposes, than what it will
earn by accumulation, then there is always a loss in
appropriating it, — whether earned, or raised by loan
or by taxes, direct or indirect,—-to accumulate in a
sinking-fund. For the same reason, in these circum-
stances, the interest on the accumulation, that is, the
interest on the interest compounded, is less in the
sinking-fund, and less profitable to the debtor/than
it would have been in his own hands and under his
own direct proper management./

During the last three years the city of New York
has added thirty-seven millions of dollars to its funded
debt, seven millions of which have gone directly or
indirectly into its sinking-fund; and three or four
millions more have been applied as the city’s quota to
make up for the deficiencies in the State sinking-fund.
But the city of New York, it may be said, is excep-
tional in extravagance of mismanagement ; it lives by
borrowing, and its example cannot fairly be used in
illustration of any principle. And yet, amid the mal- .
administration, the frauds and the robberies of that
city government, they kept up their sinking-fund, in
appearance at least, as sanctimoniously and in about
as thrifty a condition as such sham expedients for
paying debts easily have been maintained elsewhere.
The city of Boston also is a constant borrower ofmoney, and is also all the while increasing its sinking-
fund, to the great satisfaction of divers credulous per-
sons ; a million and a half of dollars having been added
to that fund the last year. During the same year the
addition to the debt of the city for money borrowed
was nine or ten millions.

j^The case of the city of Boston furnishes as conclu-
sive an argument and as convenient an illustration
of the worthlessness of the sinking-fund machinery
as any other. The sinking-fund of the city amounts,
in round numbers, to $15,000,000, which is wholly
invested in the loans, or certificates of indebtedness,
of the city itself. The total debt of the city is about
$43,000,000. But $15,000,000 of this debt belongs
to, and is held by, the city itself. That is, the city of
Boston owes to the city of Boston this $15,000,000. \
Well, suppose the debtor, the city of Boston, should
make default in payment of this $15,000,000, — and
at the present rate of accumulation of debt, municipal /
bankruptcy is not an impossible hypothesis, — what
then ? JA suit at law is the usual prompter of delin-
quent debtors. It would be interesting to see what
kind of a declaration or complaint would be framed
by the learned city functionaries to meet such a case.
Doubtless it would be averred that the city of Boston
owed the city of Boston this great sum; the non-
payment of which was of great detriment to the city
of Boston aforesaid. It is neither agreeable nor use-
ful to trifle with a subject which affects more or
less deeply the interests of the community now and
hereafter ; but surely there must sometimes spring up
in the breasts of the city fathers a feeling of doubt9

and misgiving as to the success of this financial expe-
dient, this panacea, this u soothing-syrup ” for the
ailments of the city treasury.; Nor ought it to excite
surprise if, in ruminating over this doubt, they should,
by and by, fall into the conviction that their whole
sinking-fund arrangement is a sham and a delusion,
and that they had better purge their account-books of
the whole thing; that, instead of calling their debt
$43,000,000 with $15,000,000 sinking-fund owed by
themselves to themselves, they had better call their
debt what it actually is, $28,000,000, and have done
with the farce of charging themselves $15,000,000
additional on one side of their leger, and crediting
themselves with the same sum on the other. If the
augurs of ancient Rome found it difficult to restrain
a smile when they met each other in the street, how
much less difficult must it be, in this waning nine-
teenth century, for the commissioners of this sinking-
fund to preserve becoming gravity when they assem-
ble to deliberate on the business of their charge %

Mr. George S. Boutwell, lately Secretary of the
Treasury of the United States, now Senator in Con-
gress, was brought up in the country, and evidently
made the best use of such opportunities of learning
as came within his reach. But it is obvious that
among his studies he did not include the higher
mathematics of financiering. During every year of
his administration of the Treasury he had a surplus
of revenue over expenditure. An illuminated finan-
cier, in that situation of affairs, of course would have
established a sinking-fund for the ultimate payment
of the great debt of the country. But, owing to his^10

rural education, his study of 44 Poor Richard’s Alma-
nack,” or, more than all, to his robust common-sense,
Mr. Boutwell did no such thing. He simply paid the
debt, as far as his money would go, and cancelled the
obligations. Instead, therefore, of haying our na-
tional debt remaining of its original proportions, or
increasing; with a magnificent sinking-fund, charm-
ing to financiers, we have no national sinking-fund
at all, and only a national debt a few hundred millions
less in amount than when Mr. Boutwell began the
process of reduction. His method in this particular
was simple, straightforward, practical, — intelligible to
the least instructed understanding. His whole finan-
I cial theory resolves itself into the simple proposition,
that the best way to sink a debt is to pay it; that the
: surest sinking-fund is payment. And he has made
the country his perpetual debtor by acting upon that
theory.

The debt of the country must be paid from the
property and earnings of the country. The debt
of each state and city and township and corpora-
tion is to be paid, every dollar of it, from its property
and its earnings. Disguise the matter as you may,
envelop the process in the most alluring financial
devices, give to the pill the best sugar-covered coat-
ing, it comes at last to the same thing; the bolus
must be swallowed, the debt must be paid, inexorably
paid, out of the assets of the debtor, the tax-payer,
the stockholder. It may be easier, or seem easier, to
raise a small sum annually, and deposit it as .a con-
stantly accumulating fund for the ultimate payment of
a debt which is not to mature for a series of years.And this is the most plausible argument for a sinking-
fund. But Mr. Boutwell found no difficulty in deal-
ing with this argument and this state of affairs. He
went into the market when he had a small surplus
or a large one, and bought up the national bonds.
And this every debtor state, or city, or corporation
might do, for their bonds are almost always in the
market. Indeed most of them, that have sinking-
funds, do invest more or less in their own bonds ;
but instead of cancelling them, and extinguishing
so much of their debt, they keep them in reserve, to
be reissued, it may be, and resold, as occasion may
require. The State of Maine has its sinking-fund
invested in its own bonds, due some fifteen years
hence; and the policy is to resell these same bonds
to provide funds with which to pay other bonds due
some years earlier. Perhaps that vigorous and
watchful State will lose nothing in the operation;
and probably it will not, if the custodians of the
bonds continue honest through all these years, and
no outside barbarians break in and steal. Still, the
Boutwell method is both simpler and safer, as well as
cheaper, — to extinguish the debt as far and as fast as
means are at hand, even though, in the particular's
case, it should be necessary to issue new bonds when
others outstanding shall mature.

[The argument for the sinking-fund is, that it ena-V/
bles the debtor state or city or corporation, whose \
obligations to a large amount do not mature for ten \
or twenty or thirty years, or who wishes to make



L0

loans for those periods, to provide for payment by \
accumulating instalments, instead of one great as- \J

\12

sessment at the end. In many cases, perhaps in
the majority, this may be most convenient. But as
this convenience is or may be always foreseen when
} the debt is contracted, why not provide for it at that
^ time in the simpler, cheaper, and safer mode of
making the debt itself payable and extinguishable by
instalments ? Why not issue the bonds payable, some
in each year? The additional cost for printers’ ink
could not be much. Such bonds, indeed, falling due in
successive years, might not be so attractive, or quite
so readily negotiable in the mass, to the bankers, who
prefer not only to deal in large sums, but to make
short work of it; but, meeting the views of different
classes of investors, they could not fail to find pur-
chasers, and at rates affording as good a return, and,
taking into account the other advantages, a better
return to the treasury, than the uniform long bonds. /
The State of Massachusetts has a debt of some
$27,000,000, incurred at various times for different
purposes, more or less of which is falling due each
year; and each year also new debt is contracted for
new objects. The State also has a sinking-fund, or,
rather, numerous sinking-funds ; the principle having
been acted upon, of the contemporaneous creation of
a sinking-fund^ for each permanent loan. And these
funds, on the whole, have been safely managed, and
rarely encroached upon. But the question naturally
arises, why not make the debt itself, in the first
1 instance, at the time of its creation, payable by in-
stalments ? Why keep up, unnecessarily, this cum-
bersome and somewhat expensive and hazardous
V machinery of twenty sinking-funds'? Why contract13

an inflated bond-debt for the purpose, or the seeming
purpose, of creating an equally swelling fund to meet*
it? Why make a loan payable in twenty years, when\ / _
you want to pay it, and mean to pay it, in ten or five '
years, or part in each year? Take the latest case in
illustration. The legislature of the Commonwealth, at
its recent session, authorized a loan of a million of
dollars, redeemable in not less than twenty years,
for the construction of a new State prison, and, at the
same time, directed a sinking-fund to be formed for
the redemption of that loan (with two others of less
amount) out of the proceeds of the sale of the old State
prison. Now, according to the official estimate,
which doubtless is reliable, of the value of the old
prison, $800,000, the proceeds of its sale will amount
to four-fifths of that million loan. And yet the bub-
ble, of that loan and that sinking-fund is to be kept
inflated for twenty years to come, subject to all the
risks, expenses of management, and changes of that
long period ; instead of applying the proceeds of the
sale of the old, w-hen it shall occur, to the payment
for the new, as far as they would go, in accordance
with what to men unskilled in financial theories would
seem to be the dictates of common prudence and
common-sense.

The difference, however, between contracting debt;
in order to create a sinking-fund to meet it and;
the maintaining a debt in its entirety in order to V \
accumulate a sinking-fund to redeem it in the end, is \
not very great in principle, although in practice the
latter mode of proceeding is much the most com-

mon.14

In case the annual loans, or wants of the govern-
ment for which permanent loans are usually obtained,
equal the annual amounts added to the sinking-funds,
an obvious suggestion would be, to make the one sup-
ply the other ; to make the increments of the sinking-
fund supply the place of the loan. But this is the
shocking thing which British Chancellors of the Ex-
chequer were wont to do, which also, or worse, was
done with the NewT-York fund, and with others.
This course, if it prevents additions to the debt, stops
also the increase of the sinking-fund, — a fatal objection
in the view of that class of financiers to whom debt
has no terrors so long as they can see a sinking-fund
looming in the future.

One of the mischievous consequences, and not the
least baleful at the present day, which results from
the delusion of some mysterious efficacy in a sinking-
fund to pay debt without burden to the debtor or
tax-payer, is the temptation it holds out to munici-
palities of every name to engage in expenditures for
public works and improvements in advance of the
needs of the time, under the vague impression that
the indebtedness to be incurred for such works may
easily be provided for by such a fund, and ultimately
paid, without being jnuch felt by the present or the
coming generation.

It may be added that the ill success of Dr. Frank-
lin’s scheme of accumulation for the benefit of Boston
and Philadelphia shows how difficult it is for the
wisest of men to forecast the future, and provide
against the contingencies of a changing world. By15

his calculations, which were arithmetically correct,
the £1000 sterling which he gave to each of those
cities would, in a century, become £131,000. Five-
sixths of that period have already elapsed, and the
Boston fund has only reached £36,000; while the
Philadelphia fund, it is understood, amounts to less
than £6,000. Of course the accumulation in the last
years, if there be no further losses, will be more rapid
than before; but the final result will fall very far
below the Doctor’s sanguine expectations. The benev-
olent philosopher may have been influenced to add
this codicil to his will by the writings and computa-
tions of his old friend, Dr. Price, showing^ “ what
miracles compound interest will work,” which were
then, a.d. 1789, greatly in vogue, and which undoubt-
edly had influenced Mr. Fitt, three years earlier, to
introduce and carry through his sinking-fund bill.

So far we have been considering the interests of
the debtor, and the vanity of his expectations if. he |
trusts to a sinking-fund to shield him from the inex- i
orable doom of actual and absolute payment, out of X
his own assets, of his debt to the last dollar, principal)
and interest, with the added cost, certainly, of the
management of the fund, and the possible losses
from mismanagement or dishonesty in the course of
years.

But there is another side to the case, another
party whose interests may be deemed perhaps still
more direct and more deeply involved in the subject-
matter; to wit, the creditor, for the payment of whose
debt the sinking-fund is specially provided.

LX16

! The advantage to a creditor of a sinking-fund is,
or" should be, that it furnishes an additional security
to be applied, directly and specially in the first in-
stance, to the payment of his bond, or which he can
fall back upon for payment iipcasaof default of the
debtor. The creditor looks upon it as a special
fund devoted to the payment of his particular debt,
and to be used for no other purpose whatsoever; and
such, in general, has been the language of the acts of
appropriation ever since Walpole’s time.

\ Now, in the first place, it may be conceded that if
a fund is specially set aside by the debtor for the
payment of a particular debt, and that fund is so
placed as to be absolutely and irrevocably beyond the
control of the debtor himself, and also beyond the
reach of his general creditors, in case of insolvency,
■then such a fund, so placed, like a mortgage or any
other collateral pledge, does constitute, to that extent,
%a special security to the particular creditor, available
in any event towards payment of his debt. But it is
seldom that a sinking-fund is placed, in practice,
beyond the debtor’s own control, or, in the case of cor-
porations, municipal or private, beyond the reach of
their general creditors; so seldom, indeed, that such
cases form the exceptions to the usual course of pro-
ceeding.

In the second place, when the fund remains under
the control ' of the debtor himself (and of course
within the reach of his general creditors), but is
invested in outside securities, so to speak, that is,
securities other than his own bonds or obligations,
in such case the special creditor may be considered17

as having a sort of equitable, or at least an honorary
lien upon such outside securities ; and it is possible
that he might, in some instances, have a right to the
aid of a court of equity in following such securities,
if they should be misappropriated, into the hands of
those who were parties to the misappropriation. But,
on the whole, the probability of such a right exist-
ing, and being practicably capable of enforcement, is
rather remote; and such a bond-creditor must place
his chief reliance, indeed, in most cases, his whole
reliance, as well for payment as for the due preserva-
tion of the sinking-fund securities, in the good faith;
and the continued solvency of his debtor; that is,
his legal rights are very little, if at all, strengthened
by a sinking-fund invested in such outside securities, so!
long as they remain under the control of the debtor^
himself, or within the reach of his general creditors.

Third. If the sinking-fund is invested in the debt-’"
or’s own bonds or obligations, its existence is not of
the least advantage to the creditor. It gives him no
additional security, —legal, equitable, or honorary. It f
simply gives him a second or additional promise of
his debtor; a promise no more obligatory, and no
more likely to be kept, than the debtors original
promise to pay. In the case supposed, the debtor
gives first his original and binding promise to pay the
particular debt; then he gives another promise, ex-
pressly or impliedly, that he will create, or procure
and hold, certain other promises or bonds, of himself
to himself, and treat them as a special fund for the
payment of the particular debt. Obviously, such ad-
ditional promise, or concatenation of promises, is of18

no value to the creditor; gives no additional strength

to his bond. It is a worthless device so far as he is

•—>

concerned, j

I To the creditor, then, the sinking-fund, in most
cases, is of no value ; it is never of any value what-
ever, except in the rare instances in which it is placed
absolutely beyond the control of the debtor, and out
of the reach of his general creditors. J If anybody,
therefore, invests money in the bonds of a corporation,
municipal or private, relying on such a sinking-fund
so remaining within the debtor’s power, his invest-
ment rests, so far, on a basis wholly shadowy and
deceptive. 1 If the debtor is able to pay the original
debt, well and good ; but the sinking-fund gives no
additional guaranty ; it adds nothing to the security.

To the debtor, however, the sinking-fund is always
an expense, — often a snare and a delusion. If it
tempts him, if it leads any city, town, or state, to con-
tract unnecessary or not indispensable debt, under
the futile hope that through its wonder-working
accumulations that debt is to be extinguished with-
out the hardships of taxation and self-denial; without,
in short, raising the last dollar of the loan with inter-
est in one form or another, then the sinking-fund is
more than an empty delusion; then it inflicts on per-
sons and communities, for the present and the future,
great and positive injury and loss.3 0112 061582000