The Sinking Fund and Annuities

²⁸ A sinking fund is instituted for the payment of old debts.

However, it facilitates very much the contracting of new debts. It is a subsidiary fund always at hand to be mortgaged to help any other doubtful fund for a state exigency. I will show gradually whether this sinking fund was more frequently applied to pay old debts or contract new ones.

²⁹ Besides borrowing by anticipations and perpetual funding, there are 2 other methods in between them:

• borrowing on annuities for terms of years
• borrowing on annuities for lives

³⁰ During the reigns of King William and Queen Anne, large sums were frequently borrowed on annuities for terms of years which varied.

In 1691, an act was passed for borrowing £1 million on annuities for lives, on very advantageous terms. But the subscription was not filled up.

In 1692, the deficiency was made good by borrowing on annuities for lives at 14%, or at little more than seven years purchase.

In 1693, an act was passed for borrowing £1 million on an annuity of 14%, or of £140,000 a year for 16 years.

In 1695, those who bought those annuities were allowed to exchange them for other anuities of 96 years after paying £63 per hundred into the Exchequer.

• The difference between 14% for life and 14% for 96 years was sold for £63, or for 4.5 years purchase.

Such was the government’s instability that even these terms procured few purchasers.

In the reign of Queen Anne, money was borrowed on:

• annuities for lives, and
• annuities for terms of 32, 89, 98, and 99 years

In 1719, the proprietors of the annuities for 32 years were induced to accept, in lieu of them=

• South Sea stock amounting to 11.5 years purchase of the annuities, with
• an additional stock equal to the arrears then due on them

In 1720, most of the other annuities for terms of years were subscribed into the same fund. The long annuities at that time was £666,821 a year. On January 5, 1775, the remainder, or what was not subscribed at that time, was only £136,453.

³¹ During the two wars which began in 1739 and 1755, little money was borrowed on annuities for terms of years, or on those for lives.

An annuity for 98 or 99 years is worth nearly as much money as a perpetuity. It should be a fund for borrowing nearly as much.

But people who buy public stocks would not care to buy stocks with continually diminishing value. Such people make a very big part of the stock proprietors and buyers.

A long term annuity, with the same intrinsic value as a perpetual annuity, will not find the same number of buyers. The subscribers to a new loan generally want to sell their subscriptions as soon as possible. They greatly prefer a perpetual annuity redeemable by Parliament over an irredeemable annuity for a long term of years of equal amount. The value of the perpetual annuity may be always the same. It therefore makes a more convenient transferable stock than the an annuity for years.

³² During those 2 wars, annuities were granted as premiums to the subscribers to a new loan.

These annuities were the amount over and above the loan’s projected interest. They served as an additional encouragement to the lender, not as a fund for borrowed money.

³³ Annuities for lives was granted in 2 ways:

• on separate lives,
• on lots of lives.

In French, these are called tontines, from the name of their inventor.

When annuities are granted on separate lives, the death of every annuitant disburdens the public revenue as far as it was affected by his annuity. When annuities are granted on tontines, the liberation of the public revenue does not start until the death of all annuitants as one lot.

A lot may consist of 20 or 30 persons. The survivors succeed to the annuities of all those who die before them. The last survivor succeeds to the annuities of the whole lot. More money can always be raised by tontines than by annuities for separate lives.

An annuity, with a right of survivorship, is really worth more than an equal annuity for a separate life.

Such an annuity sells for more than it is worth because of the confidence every man naturally has in his own good fortune.

• This is the principle of the success of all lotteries.

In countries where governments raise money through annuities, tontines are preferred to annuities for separate lives. The expedient which will raise most money is almost always preferred to the expedient which will liberate the public revenue the quickest.

The type of lending used depends of the character and interest of the lenders.

³⁴ In France, a much greater proportion of the public debts consists in annuities for lives than in England.

According to a memoir presented by the Parliament of Bordeaux to the king in 1764, the total French public debt was estimated at 2.4 billion livres.

• The capital granted for the annuities for lives was 300 million or 1/8 of the whole public debt.
• The interest of the whole debt was 120 million livres.
• The annuities were 30 million a year or 1/4 of the interest.

These estimations are not exact. But since they were presented by a very respectable body as true approximations, they may be considered as exact.

The different modes of borrowing of the French and English governments is not caused by their different degrees of anxiety for liberating the public revenue.

It all arises from the different views and interests of the lenders.

³⁵ In England, the seat of government is in the greatest mercantile city in the world.

The merchants are generally the people who advance money to government. By advancing it, they mean to increase their mercantile capitals, not reduce it.

They would never subscribe unless they expected to sell their share in the subscription in a new loan with some profit.

• If they purchased annuities for lives instead of perpetual annuities, they would not always be able to sell them with a profit.
• They would always sell annuities on their own lives with loss because no man will give the same price for an annuity on another’s life, with the same age and health, for an annuity on his own life.

An annuity on the life of a third person is of equal value to the buyer and the seller.

But its real value begins to decline from the moment it is granted. It declines more as long as it exists. It can never be a transferable stock as convenient as a perpetual annuity, of which the real value is always the same.