A Brief History of Sinking Funds: Part 2

The US Experience following the Revolutionary War

Following the Revolutionary War, the US debt was understandably quite large. The recent British success with the sinking fund inspired a similar fund in the United States. Congress was so much inspired, in fact, that they invited the renowned Mr. Price to move to America to assist with the young nation’s finances following the Revolutionary War. He declined. [1]

In 1789, Alexander Hamilton, the first secretary of the treasury, decided to use a sinking fund to tackle this issue when he was tasked by Congress to come up with a plan for reducing the debt which stood at close to $80,000,000*.

According to Swanson and Tout, Hamilton’s proposed sinking fund would be funded solely by (negligible) profits from the Postal Service, but Congress changed it to funding by the sale of public lands [1]. However, that is the condensed version.

Adam Seybert gave an in-depth history of the sinking fund in his publication of 1818. The sinking fund’s make-up in its early years consisted of money from public lands sales, duties on imported goods, and dividends of the Bank of the United States stock (owned by the United States), along with any surpluses of revenues at the end of the calendar year that would be appropriated to the fund. In 1792 commissioners were appointed to manage and use the fund to purchase government securities at market price to pay down the public debt.  However, the fund had three allocations, only one of which was payment towards the ‘further and final redemption of the Public Debt, foreign and domestic, funded and unfunded.’ [3]  Commissioners were allowed to borrow money to make payments on the debt principle. There was no specific amount set aside annually for the fund from the public land sales or surpluses. It was a melting pot of sources that varied in value each year.

In 1802, Congress approved more appropriations to the fund and added a set monetary value: it would now consist of an annual sum of $7,300,000. Just one year later, in 1803, as the public debt continued to rise (largely due to the creation of stock for the payment for the Louisiana Purchase – the ‘Louisiana six percent stock’), another $700,000 had to be appropriated.

By 1817, it had been revised again to an annual allocation of ten million dollars, with an additional nine million given by the Treasury just for that year to be applied directly to the redemption of the public debt. With all the revisions and new appropriations, it was clear the sinking fund had an “irregular operation”. Seybert adds, “Strictly speaking, the essential character of a sinking fund, was not to be found in the operations of that of the United States; all its sources might vary and fail, even the application of the fund was varied with circumstances.” [3]

Seybert argued that it differed from the British version in several key ways that attributed to its lack of success: 1st, the US system did not allocate a specific sum to the sinking fund until 1802, ten years into its existence. Thus, in the 1790’s the fund commissioners could never say when the debt would be paid off, because the capital allocated to the fund was never consistent. 2nd, the US sinking fund did not set as its goal the payment of debt prior to its start date (so debt accrued prior to 1792), and the debt from things like the War of 1812 was added to its purpose. 3rd, instead of being confined to the payment of public debt and no other purpose whatsoever, the fund was used for a variety of things such as back pay to the army and the reimbursement of temporary loans.

Yet for all its drawbacks, the sinking fund did in part enable the United States redeem its debt by 1824. [1] It was perhaps not the smoothest sinking fund, but it did manage to successfully use the appropriated funds and dividends for the redemption of public debt. Perhaps Seybert was a bit harsh. Had he waited another ten years to publish his analysis, would his conclusion have changed?

I wonder why the European Redemption Fund has been compared specifically to this fund, and not, say William Pitt’s fund of the 1780’s in Britain. More on that in Part 3.

*For reference, the debt to GDP ratio of the United States stood at close to 43% in 1790. While the exact number for the debt varies depending on the source, it is safe to say that it was a pretty major amount for a fledgling country. Today the debt to GDP ratio is much higher, however the US is also considered a world power, no longer some upstart in over its head. This is a nifty tool for finding relative economic measures throughout history. They have several different measures depending on what you are comparing- I got distracted and  easily lost an hour while  just exploring this site. 

___________________

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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