FUND, SINKING, a plan pursued for a considerable period for the purpose of collect ing money for the payment of the national debt of Great Britain. It was begun in 1716 by sir Robert Walpole. Certain taxes which had previously been laid on for limited periods were then rendered perpetual, for the purpose of paying the interest of the funded debt. They prohueed more than enough for this purpose, and the surplus was laid aside, that it might accumulate into a fund for extinguishing the debt. It appeared to operate well, since, in 1728, after. it had existed for 12 years, debt was wiped off to the extent of E6,648,000. It was not observed that, during the wiping off, new debt had been created to about the same extent, so that the nation was just in the position in which it would have been had it neither borrowed nor repaid. It is supposed that sir Robert may have seen the fallacy of the sinking fund, since in 1732 he took half a mil lion from it to gneet the expenditure of the year, instead of raising a new loan. It was in 1786, however, that the system was established on a great scale by the younger Pitt, who, notwithstanding his great practical abilities, was entirely misled by the theories of Dr. Price in his work on annuities. -The system Continued ,to be conducted on an enormous scale, until another student of economy and figures conclusively proved it to be useless; this was accomplished in 1813 by Dr. Hamilton, in his Inquiry concerning the Rise and Progress, the Redemption and Present State, and the Management of the National Debt of Great Britain. The fallacy which Dr. Hamilton showed to pervade a sinking fund may be best explained by a simple example. Suppose that one requires
to borrow £100, and lays by £5 a year as a fund to pay it up with. ACcumulating at compound interest, this fund will pay back the loan in about 15 years. The bor rower will, however, gain no more by the process than if he paid the £5 a year to his creditor, for his debt would be diminishing to precisely the same extent as the fund to pay it off Would be increasing. Suppose that while requiring only £100, the borrower raises E200, and lends out one of them, accumulating the interest until the whole amounts to £200; the borrower will no doubt be receiving •interest on £100, hut he will be at the same time paying interest on £200; and he would repay his debt at the same cost and with more simplicity if, instead of borrowing the second hundred at 5 per cent, he paid over E5 a year to his ereditor:• In these instances, nothing is lost by the sinking fund. But suppose that in tile last case the creditor had agreed to lend the £100 at 5 per cent, but in consideration of the greater risk, would not lend the £200 at less than 0 per cent, while the borrower can only get 5 per cent for the half which he relends—here the transaction would cause a dead loss of £2 a year over the plan of repaying by installments. This was exactly the case with the British sinking, fund. The more money the chancellor of the exchequer wanted, the higher were the terms demanded by the lenders, and the addition to each loan for setting aside a sinking fund increased the rate of interest paid on it.