SINKING FUND. Provision for the payment of public debt is sometimes made by the establish ing of a sinking fund. A sinking fund contem plates the gradual extinction of a debt, provided by the law authorizing the debt, and while it has been discarded in the practice of the more advanced nations, is sometimes used by the na tions of weaker credit. It is needless to say that the faithful fulfillment of the condition when it exists tends to support palie credit. Sinking funds may assume various forms, but the prin ciple is simple. The State guarantees an annual appropriation, as, for instance, 1 per cent. of the principal of the debt, which is used to repurchase a part of the debt in the market. The bonds so purchased are not destroyed, but are set apart in a separate fund or sinking fund, and continue to draw interest. The interest of the first year's in stalment to the fund plus the second year's in stalment is used to purchase bonds. By this process carried out the Government in time ac quires possession of all its own bonds, which are then destroyed and the debt cancelled. This plan seems very simple and in the early part of the nineteenth century was widely adopted. Its defects are, first, that the Stale has not always the 'money available for such an appropriation; second, that it is not always expedient to pur chase bonds in the market because of the premi ums upon them, and third, that such a reserve of unredeemed securities can with difficulty he maintained inviolate in times of emergency. In view of these defects, sinking-fund arrangements planned in this way by statesmen like Pitt and lla milt on have never been followed to their logi cal conclusions. of one sort and another have been introduced which have left of the original institution little more than the name. This is shown in the history of the sinking funds in the United States, especially that of 1862. By the law of February 25. IS62. it was provided that. after the gold receipts from ens i0111,4 had been used to pay I he interest, they were to be applied "to the purchase or payment of one per mutant of the entire debt, . . . to be made within each fiscal year. which is to be set apart as a sinking fund, and the interest of which shall in like manner be applied." No obligation could be inure forum], yet it was not formally observed. No attention was paid to this provision
after the war, and at its (dose the payments and purchases did not proceed in the orderly fashion prescribed by law. The surplus Ivvcuties which for a time were abundant were used for the can cel:idol' of debt far more rapidly than had been contemplated by the law. Nor were the bonds called in or purchased retained as a fund, for by the law of July 14, 1870. it was ordered that they be canceled and destroyed, and that an amount equivalent to the interest upon such can celed bonds be paid annually into the sinking fund. In the subsequent history of the country there were epochs in which there was no debt can celation, others in which it proceeded rapidly, just as the condition of the revenues permitted. Congress and the Treasury Department have been satisfied by the explanation that the aggregate debt reduction has been far greater than that con templated by the law. The sinking fund to-day therefore stands practically as an expression of the policy of debt reduction, and of the authority of the Secretary of the Treasury to purchase bonds in the market for this purpose, and has no other significance. The expression occurring in our financial reports of purchases for the sink ing fund means simply for debt repayment.
Whenever the financial condition of the nation warrants a repayment of debt there are simpler methods of proceeding than sinking fund arrange ments. Bonds may either he called in or may be purchased in the market. Theoretically pur chase in the market is preferable when the bonds are below par, but as this condition is not likely to occur in any State which has a surplus for debt payment, the case is of no practical importance. On the other hand, the terms of the contract may be such as to prohibit calling in the bonds, as has been the case in the United States, and leave no way of redemption open except purchase at a premium. In such a case the premium paid is to be compared with the saving of interest which would have to be paid during the unexpired term of the bond before redemption becomes optional. Much more suitable, therefore, for the purposes of fiscal administration are bonds which are not limited as to term of payment, but which can be redeemed at their face value at the will of the Government.