322 REPORTS ON THE STATE OF SCIENCE, ETC. 



Therefore we regard reduction of debt as most intimately related with economy 

 in public expenditure. With economy reduction on a satisfactory scale is 

 possible ; without it such reduction will always remain subject to doubt. 



There is some room for difference of opinion in the question of immediate 

 debt redemption. It may be argued that the burden of taxation is so heavy 

 at a time of depression like the present that it is better to trust to possible 

 surpluses until trade revives once more. Certain loans have special sinkinsj 

 funds attached to them, which no doubt helped the original flotation, and still 

 keep up the market price ; it is doubtful whether this monev required for 

 these redemption payments should be met by borrowing even in a bad year. 

 If a Government is bound to provide so many millions a year for specific 

 sinking funds it is forced to retrench somewhere. For the National Debt as a 

 whole the only real sinking fund is a surplus of revenue over expenditure ; the 

 specific funds attached to special loans are illusory if the Government can meet 

 them by further borrowing. Until recently no one could have doubted that 

 it always pays to reduce debt in peace time. A common argument for early debt 

 reduction is based on the contention that as long as prices are above the normal 

 level there is an advantage in debt redemption at those higher prices, in so far 

 as fewer goods have to be surrendered to effect a payment of a specified amount 

 of debt expressed in money. There is a certain amount of truth in this, in so far 

 as the enhanced prices are wholly due to inflation of the currency. But it seems 

 to us it is not the whole truth. The burden of the payment of debt in soods 

 is also related to the total quantity of goods comprising the national dividend. 

 As that quantity increases the burden of debt redemption (as also of the 

 interest on debt) decreases, i.r. if it be assumed that interest and debt redemp- 

 tion require in goods one-tenth of the national dividend, and if at a later date 

 that dividend in goods is increased by one-third, then the proportion o^ such 

 dividend required to meet the same debt charge will be reduced from one-tenth 

 to about one-sixteenth. 



In the near future the real argument for steady reduction of debt is the 

 improvement of the national credit, which will enable conversion of debt to 

 be effected on more favourable terms. In our opinion the method of the 3-i- per 

 cent. Conversion Loan was fundamentally bad. Though it transferred short- 

 dated into a long-dated obligation, the great increase in amount of delit to be 

 redeemed, ultimately, was almost indefensible. The present policy should be 

 not to rush conversion, but to have patience and to work towards such a position 

 as will make a future conversion possible on a less interest charge without 

 addition to the nominal amount of debt. 



Note. — Mr. Gibson adds : ' In all long-period loans tlie Government 

 should reserve an early date of ontional redemption. In my opinion, in the 

 absence of a further great war British Government credit will be on a 4 per 

 cent, basis within three and on a 3^ per cent, basis within ten years.' 



During the past twelve months 455 millions of short-dated Government debt 

 (bills) has been replaced by a loncer-dated Government debt (bonds) without 

 adding to the dead-weight debt. The present Government policv of replacing 

 maturing debt and statutory obligations for the redemption of debt by bonds 

 should be continued until the time for the big funding loan arrives. 



If we compare the figures of the National Delit on March 31, 1919, with 

 the figures of August 19. 1922. it becomes clear that the portion which requires 

 immediate consideration is the bond and bill debt (with the Savings Certificates). 



Aug. 19, 1922 Marnli 1919 



Funded Debt and Annuities 

 War Loans .... 

 Victory Bonds and Funding Iioan 

 Conversion Lo\ns . 



3,610 2.485 



Bonds and Bills .... 3,025 3,705 



Foreign Debt .... 1,081 1,292 



7,716 7,482 



