1922 Encyclopædia Britannica/National Debt

National Debt.—The World War, 1914–1918, brought about a complete transformation in the size and composition of the world's national debts. Those of the belligerent countries were swollen to an enormous extent. The liabilities of the European nations were inflated to a degree which in the pre-war period would have been regarded as symptomatic of financial madness and world-wide collapse of credit. The British Prime Minister (Mr. Lloyd George), at the close of the war, estimated its cost at about 40,000 millions sterling, a figure which was accepted by a number of statisticians in Europe and America. Table I. is compiled from Paper No. IV on Public Finance, issued by the League of Nations for the International Financial Conference held at Brussels in the autumn of 1920. For purposes of comparison pre-war figures are also given, when they are available.

Table I.

The increases shown in Table I., however, cannot be regarded as mathematically correct. Like is not compared with like; the unit of value has been changed in many cases, inconvertible paper currency having been made the legal measure of value in place of a definite weight of gold in all the belligerent countries except the United States and Japan. In order to make a proper comparison it is necessary to make a correction for the depreciation expressed in gold, in the value of money in the various countries. There is, however, no mathematical formula for making this correction, but the existence of a 20% discount in the gold value of the pound sterling (in May 1921) shows that the margin of error is a very material one. From the standpoint of national finance the importance of these national debt figures depends upon their ratio to national revenue. Ratios are shown in Table II., which expresses the debt as so many years' purchase of current revenue.

The countries are arranged in Table II. according to the post-war percentages. As the true burden of debt can only be determined by the relation which it bears to capacity to carry it, it follows that Table II. gives a truer picture of the world's national debt position in 1920 than Table I.

In the case of certain countries such as Austria, Hungary, Poland, and Russia, where the depreciation of the unit of value

Table II.- Ratio of Debt to Government Revenue.

Country	Ratio of pre-war debt to pre-war revenue	Ratio of post-war debt to post-war revenue
Portugal	–	14.5 yrs. purchase
France	6.6 yrs. purchase	10.0
Switzerland[1]	17.0	9.7
Australia	0.8	7.7
Italy	6.7	7.5
Germany	1.4	7.0
Canada	1.7	6.9
Spain	7.0	6.5
South Africa	7.9	6.0
United Kingdom	3.5	5.5
Belgium	6.6	5.1
Holland	5.0	4.5
U.S.A.	1.0	4.2
Japan	3.8	2.9
India	2.6	2.8
Denmark	2.9	2.2
Sweden	2.4	2.2
Norway	2.2	1.5

reduced its gold value to an infinitesimal figure, the factor of correction is a very big one. The clearing of the financial wreckage of the war, the resumption of wealth production and exchange, must have the effect of raising the unit of value expressed in gold, and thus increase the burden of debt expressed in gold money and commodities. But this is true only of countries in which the depreciation of the unit of value was less serious. In 1921 it was quite impossible to indicate what countries would be able to restore the gold value of their currencies to the pre-war parity. The countries mentioned above, however, were clearly not in a position to restore the pre-war value of their currencies. In fact Austria in 1921 drew up a plan (at the instance of the League of Nations’ Finance Committee) providing for the creation of a new unit of value. This, if applied, would have the effect of reducing the burden of debt expressed in gold and commodities, and would, of course, facilitate the revival of Austria's economic activities. The establishment of a legal standard of value of lower gold value than existed before the war must, of course, involve loss to the creditor parties in respect of all contracts made before the war, while on the other hand it must prevent the further enrichment of the nouveaux riches who had acquired their wealth during the war period in terms of a low unit of value. On the whole a greater measure of justice to the people of Austria might be rendered by the stabilization of the unit of value at a low figure than would be secured by attempting to raise it, since the great bulk of property in Austria came into the possession of its present owners at a price which fully ex- pressed the depreciation of currency.

British National Debt. Vast changes had been effected in the British national debt. The great bulk of the debt of the United Kingdom no longer in 1921 consisted of the (practically irredeemable) annuities known as “Consols.” For the first time in the history of the British Empire it had been compelled to borrow extensively abroad during the war. The first foreign loan was issued in New York in 1915, the French and British Governments jointly and severally issuing a 5% five-year loan for $500,000,000 in Oct. of that year, the proceeds of which were divided equally between the two nations. This loan was repaid on maturity on Oct. 15 1920, and its repayment had the effect of strengthening American confidence in British national credit. Later, during the war, the British Government issued its own loans in New York; the first for $250,000,000 in two-year 5% bonds, which fell due on Sept. 1 1918, the second for $300,000,000 in three and five-year bonds bearing 51/2% interest, which fell due in Nov. 1919 and 1921. The third was for $250,000,000 in one and two-year 51/2% bonds, which fell due in Feb. 1918 and 1919. Collateral security was provided for all these loans mostly in the form of dollar bonds, which the British Government either bought or borrowed from its nationals under the Dollar Securities Mobilization Scheme. Other credits were raised in America, including a British banking credit, bearing 5% interest, for $50,000,000, which matured in June 1917; a credit of $25,000,000 for wheat purchases, which was paid off in 1917; and Treasury Bills for three months which were issued up to a maximum amount of $150,000,000 by Messrs. J. P. Morgan & Co., acting as agents for the British Treasury. Prior to the entry of the United States into the war on April 7 1917, Great Britain raised loans in America totalling $1,131,400,000. After that date the United States Government lent money freely to the British Government direct. An arrangement was made in 1919 by which interest payments on the Government loans were deferred for three years, namely, until 1922, and at the close of the year 1920 the total advances amounted to $4,196,818,000. Loans were raised in Argentina, Uruguay, Spain, Holland, Switzerland, Japan, Chile, and Sweden. The bulk of these were rapidly repaid, but the great bulk of Britain’s debt to America still remained untouched in June 1921.

In two years from April i 1919 the British external debt was reduced by ₤203,000,000; in the financial year ended March 31 1921 the reduction was ₤117,000,000. On that date the total was ₤1,161,560,000 at par of exchange. In the year 1920-21 the British debt to America was reduced by nearly ₤75,000,000, and the debt to Canada by ₤20,000,000. On March 31 1921 the only debt owed to foreign nations apart from the United States was ₤826,000 to Sweden. On the same date the British debt to Canada was $125,000,000.

The 5 % War Loan issued at the beginning of 1917 had become the premier domestic British security, the old consols being now of an inconsiderable amount comparatively and relegated to the background in the market. Cash subscriptions to the loan had amounted to ₤966,048,000, and conversions (of the earlier 41/2% Loan and Exchequer Bonds) amounted to ₤1,103,797,000, making a total of ₤2,069,845,000.

In December 1915 the principle of “continuous borrowing” was adopted for British Government war-borrowing. On the 17th of that month 5% Exchequer Bonds were put on sale, and realized, in the period which terminated on June 1 1916, ₤237,829,469. Four series of these bonds, the last series bearing 6% interest, were put on sale down to Dec. 30 1916, when the sales were temporarily suspended in preparation for the issue of the 5% War Loan, the greatest loan operation of the war. On April 13 1917 the daily sales of Exchequer Bonds were resumed, 5% Bonds being again offered at par. Sales of Exchequer Bonds, however, were brought definitely to an end on Sept. 22 1917 (partly because, by Statute, this form of issue was limited to a six-year term), and on Oct. 1 1917 a new type of security called National War Bonds, of a character more appropriate for the Government’s requirements, was offered for day-by-day subscription, bearing 5% interest and redeemable at a premium varying from ₤2 to ₤5%, according to the maturity of the bonds, which ranged from 5 to 10 years. A great deal of energy was imparted to the campaign for selling these bonds, and it achieved marked success. Down to March 31 1918 sales of these bonds amounted to no less than ₤616,193,692. The second series, sold between April 1 1918 and Sept. 30 1918, produced ₤483,224,088; the third, between Oct. 1 1918 and Jan. 18 1919, yielded ₤494,399,505; and the fourth, between Feb. 1 1919 and May 31 1919, ₤75,745,151. “Continuous borrowing” amply justified all that was expected of it. By withdrawing from active circulation large amounts of currency the daily borrowing had the effect of holding commodity prices in check, the tendency of the latter being strongly upward on account of the continuous inflation of currency and credit involved by unceasing Government borrowing from the banks. During the war period investors showed a marked preference for short-dated securities, and the Government accordingly offered securities redeemable within a comparatively few years. But with the cessation of hostilities and diminution of expenditure the Government decided to make an attempt to issue a fairly long-term loan with the object of reducing the floating debt, which was then in the neighbourhood of 1,000 millions. On June 12 1919 it issued the first Funding Loan, bearing 4% interest and redeemable at the earliest in 1960, and at the latest in 1990. The bonds were offered at 80% and produced only ₤215,200,000. At the same time the Government sold 4% Victory Bonds at 85%, subject to drawings at par almost immediately and acceptable at par in payment of death duties. These bonds produced ₤216,900,000. The failure of this operation compelled the Government to defer the question of funding any further portion of the floating debt (which rose to about 1,300 millions) for an indefinite period, especially as the demand for capital was exceedingly active, and funding could only be effected at a high cost, the Bank Rate being for over a year (from April 15 1920 to April 28 1921) 7 per cent. The approaching maturity of the short-term bonds issued during the war period, however, began to be a pressing problem in 1921, for the bonds, as they became very short, found their way to the banks and became potential floating debt. In April 1921 the Government decided to invite holders of 5% National War Bonds maturing in the years 1922 to 1925 to exchange their holdings for 31/2% conversion stock. Holders were offered ₤160 to ₤163 of new stock for every ₤100 bond, giving a yield in interest of ₤5 12s. od. to ₤5 14s. od. per cent., against ₤5 7s. 6d. on the bonds held. About ₤632,000,- 000 of bonds were affected by the offer, and if the whole had been converted the addition to the State's liabilities would have amounted to about 400 millions, and the addition to interest charges about 4 millions per annum. Applications for conversion amounted, however, to only about 160 millions. In July 1921 a further effort was made to convert the very short term bonds into eight-year Treasury Bonds bearing 51/2% interest. These bonds were offered at 97%. When the British 5% Loan was issued in 1917 a 4% “tax compounded loan” was coupled with it. It was an effort to meet an insistent public demand for a Government security exempt from the heavy rate of income tax. Another way of meeting this same demand was attempted in some degree by a departure from the practice of paying dividends less tax. The 5% War Loan, National War Bonds, and the Funding Loan all contained a provision that dividends should be paid without deduction, and that tax should be collected upon it in the holder’s annual return. The 4% Loan was not really a tax-free security. It was an issue, the interest on which was reduced to a figure which represented a compounding of income tax at the then maximum rate, namely, 5s. in the ₤1. The interest on the loan was not exempt from super-tax, and for the purpose of calculating liability to it, and also for the purpose of computing total income for purposes of exemption and abatement, it had to be assumed that the 4% interest was the net income after the deduction of income tax at the full normal rate of income tax prevailing. This meant that the holders of the 4% Loan were placed in about the same position as regards super-tax as holders of the 5% Loan, and in a worse position as regards exemption and abatement, for

Table III.- Issues of British War Loans.

Issue	Amount of Issue	Price of Issue	Date of Issue	Cash credited to H.M. Exchequer
31/2% War Loan, 1925-28	₤350,000,000	95%	Nov. 17-24 1914	₤331,798,408
3% Exchequer Bonds, 1920	50,000,000	Tender ₤95 18s. 1d. average	March 5-10 1915	47,942,345
41/2% War Loan, 1925-45	Unlimited	Par	June 21-July 10 1915	592,345,604
5% Exchequer Bonds, 1920	Unlimited	Par	Dec. 17 1915-June 1 1916	237,829,469
5% Exchequer Bonds, 1919	Unlimited	Par	June 2-Sept. 27 1916	34,262,604
5% Exchequer Bonds, 1921	Unlimited	Par	June 2-Oct. 2 1916	62,495,527
6% Exchequer Bonds, 1920	Unlimited	Par	Oct. 2-Dec. 30 1916	160,951,700
5% War Loan, 1929-47	Unlimited	95 %	Jan. 11 - Feb. 16. 16 1917	5% and 4% War Loans 941,476,710
4% War Loan, 1920-42	Unlimited	Par	Jan. 11-Feb. 16 1917	-
5% Exchequer Bonds, 1922	Unlimited	Par	April 13 - Sept. 22 1917	82,110,000
National War Bonds - 1st Series	Unlimited	Par	Oct. 1 1917 - March 31 1918	616,193,692
National War Bonds - 2nd Series	Unlimited	5% Bonds Par 4% Bonds Apr. 1-22 Par Apr. 23-Sept. 30 101 1/2 %	April 1 - Sept. 30 1918	483,224,088
National War Bonds - 3rd Series	Unlimited	5% Bonds Par 4 % Bonds 101 1/2 %	Oct. 1 1918 - Jan. 18 1919	494,399,595
National War Bonds - 4th Series	Unlimited	5 % Bonds Par 4 % Bonds 101 1/2 %	June 12-July 12 1919	75,745,151
4% Funding Loan	Unlimited	80 %	June 12 - July 12 1919	215,200,00
4 % Victory Bonds	Unlimited	85 %	June 12 - July 12 1919	216,900,00

no claim to repayment of income tax was allowed in respect of the 4% Loan interest. At the time or issue the income derived from the 4% Loan was, for the purpose of super-tax, reckoned as £5 6s. 8d., or 1s. 5d. per cent, more than the income on the 5% Loan. In 1918, when the income tax was raised to 6s. in the pound, the holders of the 4% Loan, though exempt from the tax, found that for super-tax purposes their interest from the Loan was reckoned as £5 14s. 6d. per cent., while that on the 5% Loan remained at £5 5s. 3d. This shows that the terms of the tax compounded issue had been devised with much ingenuity. The right of conversion into any future War Loan which was attached to the 41/2% Loan, floated in the middle or 1915, and also to subsequent issues of Exchequer Bonds, became operative in connexion with there two Loans, but it was considered inadvisable to attach a similar conversion option to the new loans. Instead, a device was adopted to achieve the same object, viz. protection of the loan against depreciation in price. The Treasury undertook to set aside monthly a sum equal to 1s. 8d. per cent. of each loan to be used in the purchase of stock for cancellation whenever the market price fell below the issue price, viz. 95 in the case of the 5% Loan and par in the case of the 4% Loan. Undoubtedly the operation of this fund contributed to the maintenance of the market price, but it wholly failed to prevent the stocks falling to a heavy discount, though about 30 millions were annually spent in the early years. In March 1918 an issue of nominative

[5 bonds was made‘ Their dliel distinction was the facility with which they could be purchased and sold. No filling nl lorrnr was rvquircd. The bomb could he bought like postage stamps. but they iuiled to become popular. The most successxul means or raising money [or the war lrom among small investors was by the isaue of a security entitled War Savings Certificates (see Savings Movement). This novel and important form of popular borrowing was introduced in Feb. 1916. The certificates were purchasahle at post—ollices, banks, and through rmociations farmed lor the purpose of stimulating thnir sale. Subsequently they were placed on sale at shops and rtorru. throughout the country. The certificates were issued at 155. 6d. each, and could he paid ior in instalments They were rupayahle in 5 year: mm the date olpurthnse at £1; later,thc periodotmaturity wasextend- ed to to years, and the redemption value raised to £1 65. od. The increase of capital was equivalent to a yield ol [,5 43. 7d. per cent. compound interest. This increase ol’ capital was exempted from asaassment to income tax, but no person was allowed to hold morn than 500 at a time. Although thse certifitates were issued (or a definite period, provision was made for thnir encashment at any time, but premature encrshraent was discouraged by the absence or any capital appreciation in the nrrt year at their currency. But the certificates being rcpayahle on demand at not less than the price at which they were issued, they could not dcprnriate in capital value like other marketable securities. A great development or propaganda methods took place in 1917, and more particularly in 1918, and resulted in a very great increase in subscriptions to Government securities In Table III. are shown details of the various British War Loan issues, taken from a list drawn up by the Bank of England.

On March 31 1920 the British debt reached its highest total, namely, £7,829,ooo,ooo; on March 31 1921 it had fallen to £7.573,000,000.  (C. J. M.) 

1. The high figure for Switzerland is mainly due to the fact that big loans were incurred by the Federal Government for railways.