A Brief History of Sinking Funds: Part 1

The British Experience and Mr. Richard Price

In the late 1700’s, public opinion on the sinking fund was heavily influenced by the writings of Richard Price, the British philosopher who had revitalized interest in the concept and lauded it as a magical debt eraser [2]. His name pops up all over the place in reference to sinking funds.

Great Britain had tried a sinking fund in 1717 established solely for the payment of debts and for “no other purpose whatsoever.”[3] Sadly, this plan was like when I set aside part of my budget for savings only and for no other purpose whatsoever,  and then I inevitably end up using little bits for various things, thinking, next month, next month it will be for savings only. Over the course of two decades, the British sinking fund was siphoned off for various payments including those for war expenses. In 1748 parliament had to vote to get the sinking fund back to its original purpose: No, seriously, guys. Payment of debt only. Used for no other purpose whatsoever.

And then it seemed the sinking fund had lost its allure until Richard Price published his work, “Appeal to the Public on the Subject of the National Debt”, in 1771. William Pitt consulted Mr. Price in the 1780s on using a sinking fund to reduce the British debt. The plan was to establish a fund where one million pounds was paid to the fund each year (split quarterly) which would apply solely to the reduction of national debt. The fund would then gain the dividends earned from stocks purchased by the commissioner of the fund. And the cycle would continue.  The fund was initially successful. In 1786, a surplus of 900,000 pounds sterling remained after “satisfying every branch of expenditure,” which could be devoted to the fund for the purchase of stock. Mr. Pitt then raised the surplus directed to the fund to one million pounds sterling to purchase stock.[3]

In my readings, I came across a fascinating anonymous letter sent to Parliament from someone who did not warm to the sinking fund. He pointed out that this concept may work when you have a million pound sterling surplus to devote to the fund every year, but what about when there isn’t? What happens when you have to borrow money to purchase stock? Further more the return isn’t fixed; it depends upon the fluctuation of the price of stock. This writer’s concerns were highlighted in the American experience of the 1790s, which received a harsh review in 1818. More on this in part 2. [2]

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Citations for Sinking Fund series

1.
Title: Alexander Hamilton’s Hidden Sinking Fund
Author(s): Donald F. Swanson and Andrew P. Trout
Source: The William and Mary Quarterly, Third Series, Vol. 49, No. 1 (Jan., 1992), pp. 108-116
Publisher(s): Omohundro Institute of Early American History and Culture
Stable URL: http://www.jstor.org/stable/2947337

2.
Title: Classic Writings on Economics, Volume 4: Scarce and Valuable Tracts on the National Debt and the Sinking Fund.
Selected piece: Note on the Sinking fund established by him in 1786
Author(s): William Pitt, 1786; Anonymous
(Writings selected by JR McCulloch)
Publisher: London William Pickering, 1995, p 387-400
Accessed at the Library of Congress on September 12, 2012
IBSN 1 85196252 2

3.
Title: Statistical Annals of the United States of America
Author: Adam Seybert, 1818
Publisher: Reprinted in 1970 by Augusts M. Kelley Publishers, p. 759-776
Accessed at the Library of Congress on September 12, 2012
ISBN 678 005532

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